Gross Profit vs Net Profit: Differences, Examples and How to Calculate

In simple terms, profit is the amount of money a business can generate after subtracting expenses from revenue. A company is said to have grown if its profit for the current financial year is higher than the last year. Two types of profit statements will be present in financial statements – gross profit and net profit. 

What is Gross Profit?

Gross profit is the business's total profit after subtracting all costs associated with manufacturing and selling all products and services. The gross profit is calculated by deducting the cost of goods sold (COGS) from total revenue. 

Here, the total sales amount includes all goods and services in a financial period, excluding the sales of fixed assets like equipment or buildings. Similarly, COGS includes the cost of manufacture and production, including raw material, labour, repair expenses, shipping charges, production utilities, equipment costs, etc. 

Gross profit is a valuable indication of a company's effective use of production supplies, labour, and raw materials. While it excludes a company's obligations to pay shareholders or reinvest in the business, gross profit calculation is necessary for calculating net profit.

How to Calculate Gross Profit?

The formula to calculate gross profit is, 

Gross Profit = Revenue – Cost of Goods Sold

Gross Profit Example

For example, if a company earned Rs 1,00,000 through sales and the cost of its goods was Rs 30,000, its gross profit is Rs 70,000 (1,00,000 – 30,000).

What is Net Profit?

Net profit indicates the actual profit generated by the company after deducting all the expenses. All expenses such as COGS, operating expenses, interest, and tax must be subtracted from the aggregate revenue to calculate net profit. Aggregate revenue also includes additional income generated through sale proceeds, interest on investments, etc. Operating expenses refer to all business operation costs like rent, salary, utilities, depreciation, etc. 

Net profit is an integral part of the Profit and Loss Account. Net profit is also called the company's bottom line in income statements. A company’s ability to convert sales into profits is crucial to determine its success.  

The company may decide on business strategies to improve its profitability based on the net profit. 

How to Calculate Net Profit?

To calculate net profit, the formula is 

Net Profit = Gross Profit – Expenses or

Net Profit = Total revenue – All expenses (including production and operational)

Net Profit Example

Let's understand net profit calculation with an example. Consider Sharma Enterprises, which has a gross profit of Rs 70,000 in a financial year. The expenses list includes the following:

• Rent = Rs 2000
• Utilities = Rs 850
• Salary = Rs 20,000
• Office supplies = Rs 300
• Depreciation = Rs 100
• Interest = Rs 3000
• Tax = Rs 7000

Now, the total expenses of the firm are Rs 33,250. 

Net profit = 70,000 - 33,250 = Rs 36,750.

While calculating net profit, you may get a negative value. In that case, it means that the company generated a net loss. Sometimes, the company may have a gross profit, but in the end, the company might have a net loss after considering all accumulated expenses. 

Gross Profit Net Profit Difference

Gross profit measures direct costs associated with producing goods or services. On the other hand, net profit considers all expenses the business incurred.