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Difference Between Gross Profit and Net Profit:

Learning Objectives:

  1. 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.
Definition and Explanation of Final Accounts
Trial Balance - A Starting Point for Final Accounts
Meanings and Sources of Revenue
Direct and Indirect Expenses
Matching Revenue and Expenses
Trading Account
Profit and Loss Account
Difference between Trading Account and Profit and Loss Account
Difference between Gross Profit and Net Profit
Balance Sheet
Difference between Trial Balance and Balance Sheet
Example of Trading and Profit and Loss Account and Balance Sheet

 

 

 

 

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Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 
 

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