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.