To know the Difference between Gross profit and Operating 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 Operating Profit: –
Operating Profit is that part of the revenue which is left after deducting operating cost/expenses from the Gross Profit. Operating expenses/costs include all the costs incurred on all operative activities of the business. It is also known as Earning Before Interest and Taxation (EBIT).
1. Base on Operating Revenue:
EBIT can be calculated from the total operating revenue with the following formula:
“Operating Profit/EBIT = Operating Revenue – COGS – Operating Expense/cost – Depreciation – amortization”
2. Base on Gross Profit: –
EBIT can be calculated from the Gross profit with the following formula:
“Operating Profit/EBIT = Gross Profit – Operating Expense/cost – Depreciation – amortization”
Examples of Calculation of EBIT
Example 1: –
As of 01/04/2019 A&b Co. ltd. have a stock of goods worth Rs. 35,000. The purchase goods worth Rs 1,50,000 and purchase return Rs 15,000 during the year and spent 2,000 on Carriage, 400 on loading. They sold goods for worth Rs. 5,35,000 and sale return Rs. 25,000 during the year and after that at the end of the year Rs 12,400 stock of goods left.
Other Expenses are salary 1,20,000/-, Electricity Rs. 50,000 and Depreciation of Plant and Machine Rs 10,000.
Calculate the EBIT of Mr. X.
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Solution: –
“EBIT = Operating Revenue – COGS – Operating Expense/cost – Depreciation – amortization”
First, calculate Cost of Goods Sold: –
COGS = Opening Stock + Net Purchase + Direct Expenses – Closing Stock
35000 + (150000 – 25000) + 2000 + 400 – 12400
COGS = 1,50,000/-
Operating Expenses = Salary + Electricity
=1,20,000 + 50,000
Operating Expenses =1,70,000/-
EBIT = (5,35,000 – 25,000) – 1,50,000 – 1,80,000
= 5,10,000 – 2,30,000
EBIT = 2,80,000/-
Chart of Difference between Gross Profit and Operating Profit: –
Basis |
Gross Profit
|
Operating Profit (EBIT) |
| Meaning | GP is that part of the revenue which is left after deducting all direct cost/expenses from the Net Sale | Operating Profit is that part of the revenue which is left after deducting operating cost/expenses from the Gross Profit. |
| Timing | GP is calculated before EBIT | EBIT is calculated after GP |
| Purpose | It is calculated to know the total Gross profit earned from the sale of core products during the particular accounting period. | It is calculated to know the total Actual profit earned from the sale of core products 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 | Operating Profit is dependent on GP |
| Advantage | Helpful in control over the excess Direct costs. | Helpful in control over the excess operating costs. |
| Part | GP is not a part of EBIT | EBIT is a part of GP. |
Download the chart: –
If you want to download the chart please download the following image and PDF file:-
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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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