Make Your Numbers Correct
Net profit and gross profit offer distinct viewpoints and influence the company’s objectives and choices. Knowing which costs are essential to determining whether the company made money or lost it is vital. The income generated during a specific season or trend is shown by the gross profit. Although it demonstrates the company’s effectiveness in sales, it is insufficient to assess its profitability.
The amount of money the company makes over a specific time period is shown by its net profit. Understanding sales performance may not be sufficient, but it aids in decision-making and cost reduction.
Gross Profit: What Is It?
After subtracting the expenses related to its goods and services, a company’s profit is known as its gross profit. It is computed by deducting the income from the cost of items sold. These numbers are frequently referred to as gross income or sales profit and are shown on a company’s income statement. General and non-operating expenses are not included in the computation of gross profit. A company’s goal when calculating its gross profit is to determine how well it is doing and how much it is spending on goods and services.
It is not intended to serve as the foundation for any business decisions rather, it is meant to help you understand the costs.
How is gross profit calculated?
The whole cost of items sold is subtracted from the total revenue for a given time to determine gross profit. The closing stock is subtracted from the initial stock plus the purchases made to calculate the COGS (Cost of Goods Sold). The following formula is used to determine the cost of goods sold:
Opening stock plus purchases minus closing stock is the cost of goods sold (COGS).
Find the total amount of money made after figuring out the cost of products sold. The price of each unit multiplied by the quantity sold. Use the gross profit calculation after determining the COGS and total revenue.
The following formula is used to determine gross profit:
Total revenue less total cost of products sold equals gross profit.
Net Profit: What Is It?
The real profit made by a business after all costs are subtracted from revenue is known as the net profit. The revenue earned is deducted from both variable and fixed expenses. It can be expressed as a percentage or as a number. The net profit calculation accounts for any costs that were not taken into account when determining gross profit.
How is net profit calculated?
There are two ways to compute net profit. The first would be to immediately deduct from the total revenue the costs of operating the business. Both the cost of products sold and general or administrative expenses are included in this list.
The following formula is used to determine net profit:
Gross profit less total expenses equals net profit.
Or,
Total Revenue minus Total Expenses = Net Profit
Usually, the entire income or costs are computed over a given time frame, such as a month or a year. The distinction between gross profit and net profit is that the former shows the company’s profitability before non-operating expenses are subtracted, while the latter shows the real profit following the deduction of all business-related costs.
