Dep♔reciation and amortization are not included in gross profit; they are considered operating expenses and are subtracted from revenue after calculating gross profit to arrive at net income.

Gross profit is the revenue earned by a company after deducting the direct costs of producing its products. The direct labor and direct material costs used in production are called 澳洲幸运5开奖号码历史查询:cost of goods sold (COGS). Typically, 澳洲幸运5开奖号码历史查询:depreciation and 澳洲幸运5开奖号码历史查询:amortization are not included in COGS; they are expensed as separate line items o🐟n the income statement.

Gross profit is the result of subtracting a company's cost of goods sold from total revenue. As a result, 澳洲幸运5开奖号码历史查询:depreciation and amortization are not usually ▨included in🦹 the calculation of gross profit.

However, it's important to note that there are situations when depreciation is recorded in the COGS, and it can impact gross profit—and a company's profitability.

Components of Gross Profit

There are two main components of gross profit: revenue and cost of goods sold (COGS). Revenue is the total amount of income generated from sales in a period. (Revenue is also referred to as net sales because discounts and deductions from returned merchandise may have be🅷en deducted.)

Cost of goods sold (COGS) is the direct costs associated with producing a company's goods. COGS includes both direct labor costs and any costs of materials, such as raw materials, used in producing a company's products.

Gross profit measures how effectively a company generates profit from its direct labor and direct materials. Gross profit does not include non-production costs. Only the costs and profit associated with the production facility or factory ꦛare included in gross profit. Some of these costs include the following:

• Direct materials
• Direct labor
• Equipment costs involved in production
• Utilities for the production facility
• Shipping costs

As stated earlier, gross profit is calculated by subtracting COGS from revenue. For example, if it costs $15,000 in production costs to manufacture a car, and the car sells for $20,000, the gross profit is $5,000 ($20,000 - $15,000 = $5,000).

Depreciation and Amortization

As stat🎶ed earlier, in most cases, depreciation and amortization ꧅are treated as separate line items on the income statement.

Depreciation is typically used with fixed assets or 澳洲幸运5开奖号码历史查询:tangible assets, such as 澳洲幸运5开奖号码历史查询:property, plant, and equipment (PP&E). Depreciation is a method of allocating the cost of an asset over its expected useful life. Instead of recording the purchase of an asset in year one, which would reduce profits, businesses can spread that cost out over the years, allowin⛄g them to earn revenue f🔯rom the asset.

Amortization is similar to depreciation but is used with 澳洲幸运5开奖号码历史查询:intangible assets, such as patents. Amortization spreads out the 澳洲幸运5开奖号码历史查询:capital expenses for intangible assets over a specific time frame—typically over the us༒eful life of the asset.

Both depreciation and amortization are accounting methods designed to help companies recognize expenses over several years. Accounting for these expenses reduces the amount of a company's profit, which allows a company to have a lower taxable income. Since depreciation and amortization are not typically part of COGS—meaning they're not tied directly to production—they're not included in gross profit.

Ex🅠ample of Gross Profit, Depreciation, and Amortization

Below is a p🔜ortion of the income statement for the former J.C. Penney Company Inc.ꦚ as of May 4, 2019.

• Total revenue is highlighted in green: $2.55 billion; COGS is beneath revenue: $1.63 billion.
• Depreciation and amortization ($147 million) are listed separately, highlighted in yellow. 
• For J.C. Penney, gross profit for the period would include revenue and COGS. Depreciation and amortization would not be used in the gross profit calculation but instead would be included in the calculation of operating income. J.C. Penney's operating income for the quarter came in at -93 million—a loss.

The source of the depreciation expense determines whether the expense is allocated between COGS or 澳洲幸运5开奖号码历史查询:operating expenses. Some&nb🐼🌌sp;depreciation expenses are included in the COGS and, therefore, are captured in gross profit.

For example, the depreciation of the building for the corporate office and its furniture would not be included in COGS because it's not a direct cost associated with the production of goods. However, a portion of depreciation on the manufacturer's plant or facility would be included in the overhead costs or fixed costs for the plant. As a result, that portion of depreciation might also be included in COGS because the depreciation is directly tied to the factory.

It is much more rare to see amortization included as a 澳洲幸运5开奖号码历史查询:direct cost of production, although some businesses such as rental operations may include it. Otherwise, amortized expenses are typically not captured in gross profit. Accounting trea🎃tment on income statements varies somewhat for each business and by industry.

The Bottom Line

Depreciation and amortization are not included in gross profit. They are considered operating expenses, and as a result, they are subtracted from revenue after calculating gross profit to arrive at net income. Gross profit is calculated by subtracting the cost of goods sold (COGS) from tot🔯al revenue,▨ which does not include depreciation and amortization expenses.