The gross profit method estimates ending inventory by applying an expected gross margin relationship to net sales.
The gross profit method is an accounting estimation technique used to approximate ending inventory when a full physical count is not available.
It starts with goods available for sale and then estimates cost of goods sold by applying an expected gross profit relationship to sales. The remainder becomes estimated ending inventory.
The method is useful for:
It is an estimation tool, not a substitute for strong inventory records or a reliable physical count.
The gross profit method is often discussed alongside inventory valuation, inventory adjustment, and count-based procedures such as cycle counting.