Which item is typically deducted from revenue to calculate gross profit?

To calculate gross profit, the commonly used formula is:

Gross Profit = Revenue - Cost of Goods Sold (COGS)

Cost of Goods Sold represents the direct costs attributable to the production of the goods sold by a company. This includes expenses such as materials and labor directly used to create the product. By deducting COGS from revenue, businesses can ascertain how much profit is generated directly from their sales activities before accounting for other expenses such as operating expenses, interest, and taxes.

In contrast, net income is not deducted from revenue since it represents the overall profitability after all expenses, including COGS, operating expenses, taxes, and interest, have been accounted for. Operating expenses encompass broader costs related to running a business that are not directly tied to the production of goods, while interest expense pertains to costs related to borrowed funds, neither of which are involved in the calculation of gross profit.