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
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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/-
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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: –
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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.
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