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

COGS = 101500/- Gross Profit = Net Sale - COGS

  120000-101500

Gross Profit = 18,500/-

Meaning of Net Profit: -

Net Profit is that part of the revenue which is left after deducting total cost/expenses from the Net Sale or indirect cost/ expense from the Gross Profit. Indirect expenses/cost include all the costs incurred on the administrative expenses, selling & distribution, financing cost, and Taxation.

"Net Profit = Gross Profit + Indirect Incomes - Indirect Expense/cost" 

Example: - 

Continue with the Last example, Further Mr. X paid a salary to his employees 2,500/-, shop rent 1,000 and Shop lighting 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: -

Basis	Gross Profit	Net Profit
Meaning	GP is that part of the revenue which is left after deducting all direct cost/expenses from the Net Sale	NP is that part of the revenue which is left after deducting total cost/expenses from the Net Sale or indirect cost/ expense from the GP.
Timing	GP is calculated before NP	NP is calculated after GP
Purpose	it is calculated to know the total profit earned during the particular accounting period.	it is calculated to know the actual profit earned during the particular accounting period.
Stage	It is calculated on the first stage of the final account.	It is calculated on the second stage of the final account.
Dependency	GP is Independent	NP is dependent on GP
Advantage	Helpful in controlling excess costs.	Helpful in knowing the performance of the company in a financial year.
Part	GP is not a part of NP	NP is a part of GP.
Treatment in the balance sheet	GP is not treated directly in the balance sheet. It is transferred to the Profit and loss account.	NP is treated directly in the balance sheet by adding or subtracting from the capital.

Download the chart: -

If you want to download the chart please download the following image and PDF file:-

The conclusion of the difference: -

Is simple we can say that, these are the important terms of accounting to know the actual growth or decline of an entity in the year-by-year comparison of these terms. Thanks Please share with your friends   Comment if you have any questions. Check out T.S. Grewal +1 Book 2019 @ Amazon. in