8 Major Difference between Gross profit and Net Profit – In English
Meaning of Gross Profit:
Gross profit is that part of revenue that is left after net sales has been deducted from all direct costs/expenses. All direct costs/expenses means cost of goods sold (COGS). COGS includes all the costs incurred on the production of the product in the manufacturing unit or in the business unit cost of the demand for the product.
“Gross Profit = Net Sales – Cost of Goods Sold”
Net Sales = Total Sales – Sales Return
COGS = Opening Stock + Net Purchases + Direct Expenses – Closing Stock.
Net purchase = Net purchase – Purchase return
Example:
Mr. X bought goods for 100,000 and spent 1,000 on freight and transportation, 500 on octroi. He sold these goods to Mr. Y for Rs.120,000. Calculate the gross profit earned by Mr. X.
Solution: –
First, calculate the cost of goods sold:-
COGS = Opening Stock + Net Purchase + Direct Expenses – Closing Stock
0 + 100000+1000+500-0
COGS = 101500/-
Gross Profit = Net Sales – COGS
120000-101500
Gross Profit = 18,500/-
Meaning of Net Profit:
Net profit is that part of revenue that is left after subtracting total costs/expenses from net sales or indirect costs/expenses from gross profit. Indirect expenses/costs include all costs incurred on administrative expenses, selling and distribution, financing costs and taxation.
“Net Profit = Gross Profit + Indirect Income – Indirect Expense/cost”
Example:
Continuing with the last example, further Mr. X paid his employees Rs.2,500/-, shop rent Rs.1,000 and shop lighting Rs.200. Now calculate the net profit earned by Mr. X.
Solution:
Net Profit = Gross Profit – Indirect Cost/ Expenses
We already got Gross Profit = 18,500/-
SO, 18500 – 2500 -1000 – 200
Net Profit = 14,800/-
Chart of Difference between Gross Profit and Net Profit:
Gross Profit:
Meaning GP is that part of revenue that is left after deducting all direct costs/expenses from net sales.
GP is calculated before NP.
It is calculated to know the total profit earned during a particular accounting period.
It is calculated in the first stage of the final account.
GP is independent.
Helpful in controlling additional costs.
GP is not a part of NP.
GP is not considered directly in the balance sheet. It is transferred to Profit and Loss Account.
Net Profit:
NP is that part of revenue that is left after deducting all direct costs/expenses from net sales or GP as indirect costs/expenses.
NP is calculated after GP
It is calculated to know the actual profit earned during the particular accounting period.
It is calculated at the second stage of the final account.
NP is dependent on GP
Helpful to know the performance of the company in a financial year
NP is a part of GP.
NP is considered directly in the balance sheet by adding or subtracting from capital.