Difference between Gross profit and Net Profit

Every investor invests his money in the business to earn profit from it. The profit is to work as an incentive to the investors in taking the risk and blocking their resources. The Profit can be classified as gross profit and net profit. To know the Difference between Gross profit and Net Profit first, we have to know the meaning and calculation method of both.

Meaning of Gross Profit: -

Gross Profit is that part of the revenue which is left after deducting all direct cost/expenses from the Net Sale. All direct cost/ expense means Cost of Goods Sold (COGS). COGS include all the cost incurred on the production of the product in the manufacturing unit or in the trading unit cost of requisition of the product.

"Gross Profit = Net Sales - Cost of Goods Sold" 

• Net Sales = Total Sales - Sales Return
• COGS =  Opening Stock + Net Purchase + Direct Expense - Closing Stock.
  • Net Purchase = Total Purchase - Purchase Return

Example: - 

Mr. X purchase goods worth 100,000 and spent 1,000 on freight and transportation, 500 on octroi. He sold these goods to Mr. Y for 120,000. Calculate the Gross Profit earned by Mr. X. Solution: - First, calculate Cost of Goods Sold: - COGS =  Opening Stock + Net Purchase + Direct Expenses - Closing Stock

 0 + 100000+1000+500-0