Difference Between Gross Profit and Net Profit
Gross Profit Vs Net Profit: Difference
The main difference between gross profit and net profit is that gross profit reveals how much a business has spent on buying and selling a product/service and net profit shows the liquidity position of the company. A few other differences between gross profit and net profit are:
| Basis | Gross Profit | Net Profit |
|---|---|---|
| Meaning | Gross profit refers to the profits of a company after subtracting the costs associated with the buying and selling of a product or a service from the revenue. | Net profit reveals a company’s real profit after deducting all the expenses from the total revenue generated. |
| Purpose | Identify the costs related to the goods and minimize them. | Show the financial health of a business and helps take business decisions. |
| Benefit | Manage any extra costs | Determine the company’s financial performance. |
| Decision-making | It is not reliable to take any financial decisions based on gross profit value alone as it does not cover expenses. | Net profit is the basis of financial decision-making for business development and expansion. |
| Calculation | Gross profit = Revenue – Cost of goods sold | Net profit = Gross Profit/Total revenue – Total expenses |
Get Your Numbers Right
Gross profit and net profit provide different perspectives and affect the goals and decision-making of the business. It’s crucial to understand which expenses are necessary to understand if the business made or lost money. Gross profit indicates the revenue generated in a particular season or during trends. While it shows the sales effectiveness of the business, it is not enough to determine the profitability of the business.
Net profit shows the amount of money the business is making in a certain period. It may not be enough to understand how sales are performing, but it helps take decisions and save costs.
What is Gross Profit?
Gross profit is a company’s profit after deducting the costs associated with its products and services. It is calculated by subtracting the cost of goods sold from the revenue generated. These figures appear on the income statement of a company and are often referred to as gross income or sales profit. Gross profit calculation does not include any general or non-operating expenses. When a business calculates its gross profit, it aims to understand how a business is performing and how much its spending on its products and services.
It is only meant to understand the costs and is not meant to be the basis for taking any business decisions.
How to calculate Gross Profit?
Gross profit can be calculated by subtracting the total cost of goods sold from the total revenue generated in a particular period. The COGS (Cost of Goods Sold) is determined by deducting the closing stock from opening stock plus purchases made. The formula for calculating cost of goods sold is:
Cost of goods sold (COGS) = (Opening stock + Purchases) – Closing stock
After calculating the cost of goods sold, determine the total revenue generated. Multiply the number of units sold by the price of each unit. Once both COGS and total revenue have been identified, apply the formula for gross profit.
The formula for calculating gross profit is:
Gross profit = Total revenue – Total cost of goods sold
What is Net Profit?
The net profit is a company’s actual profit after deducting all the expenses from the revenue. Both variable and fixed expenses are subtracted from the revenue generated. It can be represented in the form of a number or percentage. All the expenses that were not included when calculating gross profit are covered in the net profit calculation.
How to calculate Net Profit?
Net profit can be calculated in 2 methods. The first one would be to directly subtract all the expenses incurred to run the business from the total revenue calculated. The expenses here refer to both the cost of goods sold and general or administrative expenses.
The formula for calculating net profit is:
Net Profit = Gross Profit – Total expenses
Or,
Net Profit = Total Revenue – Total Expenses
The total revenue or expenses are typically calculated in a specific time period, like a month or a year. The difference between gross profit and net profit is that gross profit reveals the profitability of the company excluding non-operating expenses, and net profit is the actual profit after deducting all the expenses incurred to run the business.
