Difference between Gross profit and Net Profit

Difference between Gross profit and Net Profit`

Every investor invests his money in the business to earn profit from it. The profit is 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 cost incurred on the administrative expenses, selling & distribution, financing cost and Taxation.

“Net Profit = Gross Profit – Indirect Expense/cost” 

Example: – 

Continue with the Last example, Further Mr X paid 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 Profit and loss account. NP is treated directly in the balance sheet by adding or subtracting from the capital.

If you want to Download the chart, please download the following image: –

Chat of Differences between Gross profit and Net Profit 300x230 - Difference between Gross profit and Net Profit
Chat of Differences
application pdf - Difference between Gross profit and Net Profit
Chart of Difference – pdf

The conclusion: –

Is simple we can say that, these are the important terms of accounting to know the actual grow or decline of an entity in the year by year comparison of these terms.

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