Gross Profit v/s Net Profit

8 August 2022
3 mins read
When creating income statements & making crucial decisions on managing a Company, it is critical to calculate gross profit & net income. Read More.
Gross Profit v/s Net Profit

Gross Profit vs Net Profit, which one is better?

The money that a firm makes is called profit. Understanding the expansion of the company is made easier by comparing current earnings to profits from earlier accounting periods.

You should be familiar with the two types of profits: gross profit and net profit, in order to produce accurate financial statements and track the financial health of your company.

What is gross profit & how does it help you?

Gross profit is the amount of money a company keeps after deducting all of the expenses incurred in producing and offering its goods or services. By subtracting the cost of goods sold (COGS) from your total sales, you may determine gross profit.

Include all items sold during a financial quarter when computing total sales; do not include sales of fixed assets like buildings or equipment.

You may better comprehend revenue-generating expenses by looking at gross profit. The gross profit value declines when the cost of goods sold (COGS) rises, leaving you with less money to cover operational costs. You will have more money available to spend on running your firm if the profit rises as the COGS value falls.

Formula to find Gross Profit :

The formula for gross profit is as follows:

Gross Profit = Revenue – Cost of Goods Sold

What is net profit & how is it beneficial to us?

Net profit is the amount of money your company makes during a specific time period after subtracting all operational, interest, and tax costs. You need to know a company’s gross profit to calculate this figure. Net loss is the term used when net profit is negative.

Another crucial factor that assesses the financial stability of your company is net profit. It demonstrates if the company can generate more revenue than it spends. You may use your net profit to guide your decisions about when to expand your firm, how to do so, and how to save costs. 

Net profit provides information about your company’s profitability. Knowing about it gives a number of advantages that are good for the company.

How to calculate Net Profit?

For net profit to be useful, you’ll need to know how to calculate it. Here is a formula you can use to calculate net profit:

net profit = total revenue – total expenses

You can also use the following formula:

net profit = gross profit – expenses

Difference between gross & net profit & Conclusion

While gross profit is the amount of money left over after deducting the cost of items sold from revenue, net profit shows how much money is left over after paying all allowed company expenditures. To get at net profit, you must first compute gross profit. You may create an income statement if you are aware of your gross and net profit’s accurate amounts. The proper calculation of the numbers is crucial since gross profit and net profit are interdependent. This would assist you to determine whether your firm is operating efficiently and keep the data up to date.