Difference Between Gross Profit and
Net Profit:
Learning Objectives:
-
Distinguish between gross profit and net
profit.
Gross Profit or Loss:
Gross
profit is ascertained by deducting cost of goods
sold (all direct expenses like purchases, carriage,
custom duty, sock charges, octroi duty etc.) from
sales.
|
Gross profit = Total sales - All direct
expenses or cost of goods sold |
For
example, suppose Mr. X purchased some goods for
$10,000 and paid $200 on account of carriage and
$100 as octroi duty. He sold the goods for $1,4000.
Now, the cost of goods sold will be $10,300 (10,000
+ 200 + 100) and gross profit will be $3,700.
Gross profit = Total sales - Cost of goods sold
=
14000 - 10300
=3,700
Thus the account
which is prepared to determine the gross profit or
gross loss of a business concern is called trading
account.
Net Profit or Loss:
It is ascertained
by deducting all indirect expenses (the expenses
incurred for running the business and selling the
goods) from the gross profit.
|
Net profit = Gross profit - All indirect
expenses |
Suppose in the above example, Mr. X paid $1,000 as
salaries and $500 as rent. His net profit will be
$2,200.
Net
profit = Gross profit - All indirect expenses
=
3,700 - 1,500
=
2,200
Thus the account
which is prepared to determine the net profit or net
loss of a business concern is called profit and loss
account.
Following are the main points of difference between
gross profit and net profit:
| |
Gross Profit
|
|
Net Profit
|
|
1 |
It is the
excess of net sales over cost of
purchase or manufacture (all expense
relating to purchase or manufacture of
goods) of goods. |
1 |
It is the
excess of gross profit over all indirect
expenses. |
|
2 |
It is not
true profit of the business |
2 |
It is true
profit of the business. |
|
3 |
It shows
credit balance of the trading account |
3 |
It shows
credit balance of the profit and loss
account. |
|
4 |
The
progress of the business can be judged
by the comparison of gross profit
with net sales |
4 |
The
profitability of the business can be
measured by the comparison of net profit
with net sales. |
|
