Net Profit can be defined as a difference between the gross profit and operating as well non-operating expenses of a business. It is calculated by subtracting both operating and non-operating expenses from the operating profit after considering non-operating incomes as well. Algebraically, it can be written as
Net Profit = Gross Profit – Operating Expenses – Non-operating Expenses + Non-Operating Incomes
Non-operating expenses are those expenses that are not directly related or incurred for carrying the business activities. It consists of loss on sale of fixed assets, interest on the loan, loss due to accident, etc. In the same way, non-operating incomes are those incomes that are not directly generated from the main business activities of a business. It consists of profit on the sale of fixed assets, income received from investments, etc. Net profit can also be calculated with the help of operating profit by using the given below formula
Net Profit = Operating Profit + Non-Operating Incomes – Non-Operating Expenses
Difference between Gross Profit and Net Profit
The given below are points of distinction between Gross Profit and Net Profit
| Basis of Difference | Gross Profit | Net Profit |
|---|---|---|
| Revealed | It is revealed through Trading Account. | It is revealed through the Profit and Loss Account. |
| Transfer | It is transferred to the credit side of the Profit and Loss Account. | It is added to the capital account of the proprietor on the Liabilities side of the Balance Sheet. |
| Inclusion | Income from other sources is not included in this profit. | Income from other sources is included in this profit. |
| Effect | It affects the amount of net profit. | It does not have any effect on the amount of gross profit. |
| Formula | Gross profit = Net Sales – Cost of Goods Sold | Net Profit = Gross Profit + Other Incomes – Indirect expenses and Losses |
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