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Home » Final Accounts » Difference between Gross Profit and Net Profit

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:

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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