Difference Between Gross Profit and Net Profit

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

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Business Quiz

Test your knowledge about topics related to business

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In business, stakeholders are defined as:

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Cash flow is:

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_________ is an important consideration for setting up an office.

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The Standard of living is the number of goods and services people can buy with the money they have.

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

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Wages and taxes that a company pays are examples of:

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What is revenue?

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The return of shares to the company is known as ___________.

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A building jointly owned is called office________.

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Office is a place where ___________.

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Gross Profit vs Net Profit

The difference between gross profit and net profit is 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

The gross profit is the expected profit that may or may not achieve after the sales of all products. 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 fulfill 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 labor 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, 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, 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 transfer 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
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