Difference between Gross and Net Profit

WHAT IS GROSS PROFIT ?

Gross profit refers to the amount of money that is left after all the manufacturing costs are deducted from the revenues. This means that Gross Profit is the difference between net sales revenue and cost of sales.

COGS typically includes the cost of making and selling the product or the cost of services provided by the company. Such expenses include raw material cost, carriage inwards, wages, freight inwards etc.

 It helps in determining the efficiency of the firm pertaining to production and pricing activities.

It is calculated as –

Gross Profit = Revenue – Cost of Goods Sold

WHAT IS NET PROFIT ?

Net profit refers to the amount of earnings left with an organization after deducting all the expenses involved in operations, interest, and taxes.

It is a component of Profit and Loss Account and is also known as a ‘bottom line’ for its position in income statements. The net profit is also known as Net loss if the amount is in negative .

It is an important measure which helps both internal as well as the external stakeholders in making various managerial decisions .

It is calculated as –

Net Profit = Gross Profit + Other Incomes – Indirect Expenses

DIFFERENCE BETWEEN GROSS PROFIT AND NET PROFIT

BASIS GROSS PROFIT NET PROFIT
Objective It helps to minimize costs. Its main objective is to estimate the proficiency of firms.
Purpose Gross profit is calculated to understand the impact of the manufacturing costs on the profits of the company.

Net profit is calculated to determine the performance of the company in a specific financial year.

Reliability  Gross profit is less reliable since it ignores other expenses, taxes, and interests on loans while calculating the profit. Net profit is calculated after deducting all types of cash outflows , therefore it is more reliable and shows true and fair picture of the firm.
Financial Treatment It is shown on the credit side of trading account. It appears on the credit side of profit and loss account.
Formula Gross Profit = Revenue – Cost of Goods Sold Net Profit = Gross Profit – Expenses
Inclusion of expenses Gross profit doesn’t account for other costs, such as operating expenses or other overheads, taxation, interest and payroll. Net profit accounts for all the  operating, interest, and tax expenses, in addition to deducting the COGS .

 

Thus, both gross profit and net profit play an essential role in determining a firm’s financial standing and performance. They must be calculated and presented accurately in the financial statements to help the investors as well as the managers in decision making.

Accounting & Finance for Banking

Principles & Practices of Banking Module E Pdf

Free
Module E PPB ePDFs available in our android app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Leave a reply

Please enter your comment!
Please enter your name here

Popular

Free Live Classes

spot_img

More from author

All about KYC/AML Exam by IIBF

All about KYC/AML Exam by IIBF The KYC/AML is a professional certification exam in Anti Money Laundering and Know your customer conducted by the Indian...

CCP- Certified Credit Professional Course by IIBF

IIBF CCP (Certified Credit Professional) exam is an All-India Exam directed by the Indian Institute of Banking and Finance (IIBF) to select competent candidates...

What is Digital Banking in Detail

Digital Banking is the automation of traditional banking services. It is defined as banking done through the digital platform, doing away with all the...

Digital Banking Course By IIBF

Digital Banking Course By IIBF Certificate course in Digital Banking is conducted by IIBF to provide practicing bankers a sound foundation in the digital banking...