- Gross profit is excess of sale over cost of goods sold . But net profit is excess of gross profit over indirect expenses.
- Company always calculates his selling price on basis gross profit on sale . Suppose A Co. wants to sell its product . But before selling it to customers A Co. must decide his product's selling price . After doing market survey , company finds that other concern of same product are earning 20% gross profit or gross margin on sale . So, A Co. can also decide 15 % to 20 % adding gross profit of sale in total cost . So , gross profit is important to calculate from price determining point of view . But net profit is calculated for watching the trend of business result .
- Normally , Company can calculate gross profit by making trading accounting of business . But net profit is ascertained only after making profit and loss account .
- Know difference with Practical Example :-
Suppose in the end of a company shows following items
Opening stock = Rs. 10000
Purchase = Rs. 4000
Wages and carriage = Rs. 3000
Closing stock =Rs. 7000
Sale = Rs. 20000
Office and administrative expenses = Rs. 6000
Calculation of gross and net profit on the basis of formula and by making
trading and profit and loss account
Cost of goods sold
= Opening stock + Purchase + Direct expenses - Closing stock
Gross profit = Sale - Cost of goods sold
= Rs. 10000
= Gross profit - Indirect Expenses
= 10000 - 6000 = Rs. 4000
Trading and profit and loss account for the year ended