Gross Profit vs Net Profit: Difference and Comparison

Business organizations produce goods and services to satisfy their investors. Investors are given profits from the revenue earned by the company quarterly or yearly.

Key Takeaways

  1. Gross profit is the revenue that remains after deducting the cost of goods sold, while net profit is the amount of income that remains after deducting all expenses.
  2. Gross profit is used to determine the profitability of a company’s core business activities, while net profit reflects the overall profitability of a company, including all expenses.
  3. Gross profit is calculated before operating expenses, such as rent and salaries, while net profit is calculated after all operating costs and taxes are deducted.

Gross Profit vs Net Profit

The difference between gross and net profit is that gross profit is invaded by subtracting the total cost of goods sold from the total yield. On the other hand, net profit is obtained by subtracting the indirect and direct expenses from the total yield. Gross profit gives rough profits, but net profit gives real profits.

Gross Profit vs Net Profit
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Test your knowledge about topics related to business

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_________ is an important consideration for setting up an office.

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Importing goods for the purpose of re-export is termed as ___________.

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Non-economic activities aim at __________.

4 / 10

Office is a place where ___________.

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Which of the following is not an economic activity?

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A partner in a firm _____.

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_________ deals with appointing people and placing them at the appropriate jobs.

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If a general manager asks the sales manager to recruit some salesman on his behalf, it is an instance of ___________.

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Who takes no active part in Business?

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The gross profit is the expected profit that may or may not be achieved after all product sales. The gross profit only includes the direct expenses incurred for producing the goods and services.

The net profit is the actual profit earned by the company in a particular accounting period. It is invaded by deducting all the indirect expenses from the gross profit or both direct and indirect costs from the total revenue.

Comparison Table

Parameters of ComparisonGross ProfitNet Profit
ObjectiveGross profit is used to measure the efficiency of management in using company resources.Net profit is used to measure the financial condition of the company in the market.
Costs includedDirect or explicit costs are included in gross profit calculation..Indirect costs or implicit costs are included in the net profit calculation.
InclusionGross profit is included in the income statement of the company above net profit and under the revenue.Net profit is included in the income statement in the last line, under the retained profits heading.
Formula  GP= total revenue –the cost of goods soldNP= GP- all indirect expenses.
Profitability analysisGross profit margin is used to gain knowledge of the average gross profit earned for each sale of the good.Net profit margin is used to know the percentage of net profit earned from the total revenue after deducting all expenses.

What is Gross Profit?

Business organizations earn profit by producing products and services to fulfil the needs of customers. To measure profitability, organizations use metrics like gross profit and net profit.

The gross profit includes the direct costs incurred in the manufacturing process, such as material costs, shipping charges, transportation, direct labour costs, and other costs that are directly incurred during the manufacturing process and which can easily be estimated.

The gross profit is included in the financial statement to show the operational efficiency and management capabilities in using company resources.

gross profit

What is Net Profit?

Net profit is the other important metric to measure the profitability of the organization. It is the overall profit retained by the company after paying all the direct expenses, debt, taxes, salaries, and other indirect expenses.

The net profit in the balance sheet attracts investors and shareholders. It can be improved by reducing overhead costs and travel expenses and increasing sales.

The net profit is transferred to the capital account if the business is a partnership business, and the corporate business transfers the amount into the profit and loss account.

net profit

Main Differences Between Gross Profit and Net Profit

  1. Gross profit is inserted under the revenue, and net profit is appended in the last line of the financial statement.
  2. Net profit gives more insights into the business efficiency than gross profit.
Difference Between Gross Profit and Net Profit
References
  1. https://www.google.co.in/books/edition/A_Text_Book_of_I_S_C_Economics_Vol_II/ubjiXNPH3cUC?hl=en&gbpv=1&dq=books+on+gross+and+net+profit+theory&pg=PA244&printsec=frontcover
  2. https://link.springer.com/content/pdf/10.1007/0-387-29903-3_1.pdf

Last Updated : 26 June, 2023

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25 thoughts on “Gross Profit vs Net Profit: Difference and Comparison”

  1. The detailed comparison table is very helpful in understanding the differences between gross profit and net profit.

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  3. This is such an important aspect of business finance. The explanations are quite clear and I learned a lot from reading this article.

  4. Thank you for sharing this informative article. The comparison table adds clarity to the concepts discussed.

  5. Avatar of Knight Stacey
    Knight Stacey

    The explanations of gross and net profit are detailed and well-organized. I appreciate the depth of information.

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    1. This information will be very helpful for anyone trying to understand the financials of a business.

  7. I found the sections on the objective and inclusion of gross and net profit in the income statement to be quite illuminating.

  8. Avatar of Lily Robinson
    Lily Robinson

    The article effectively captures the essence of gross and net profit, making it understandable to a wide audience.

    1. The language used is accessible, and the examples provided are relatable, which enhances the learning experience.

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