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What is difference between gross profit and net profit ?

Gross profit and net profit both show the performance of company's business . Both are needed to make for evaluating business performance . But there are many difference between gross profit and net profit . To know difference is also important from calculating point of view . Following are main differences between gross profit and net profit .

  • 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

= 10000+4000+3000-7000

=10000

Gross profit = Sale - Cost of goods sold

= 20000-10000

= Rs. 10000

Net profit

= Gross profit - Indirect Expenses

= 10000 - 6000 = Rs. 4000


Trading and profit and loss account for the year ended

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Accounting Education: What is difference between gross profit and net profit ?
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