 Hello in this lecture we're going to define gross margin according to fundamental accounting principles while 22nd edition the definition of gross margin is also called gross profit net sales minus cost of goods sold definition net sales not net income that's going to be sales minus the contra sales accounts which are returns and allowances that's basically the sales number minus the cost of goods sold that's the cost of the inventory that we are selling if we're a manufacturing company or a merchandising company that cost of sales being the most important expense usually the largest expense therefore we have this section on the income statement generally if we have a multi step income statement to calculate the gross margin or also called the gross profit we look at the calculation we would say sales and again sales being here representing net sales meaning meaning the bottom line number on the sales section of the multi step income statement sales minus sales return allowance and discount being 100 000 in this case we're going to subtract out the cost of goods sold the most important expense the expense related to the inventory that we are selling that would then give us the gross margin 25 000 also called gross profit 20 sides 25 000 we're not yet down to net income the bottom line of the income statement but the gross margin or the gross profit is a very important number and getting down to that bottom line number on the income statement that's why it's often broken out in a multi step income statement when we're talking about a manufacturing company or a company with inventory because that cost of goods sold relationship to sales is very important