What is the difference between
gross profit and net profit?

Definition of Gross Profit

Gross profit is defined as net sales minus the cost of goods sold.

Example of Gross Profit

Assume that a retailer had gross sales of $220,000 and sales returns and allowances of $20,000 during a recent year. Also assume that its cost of goods sold during the year amounted to $140,000. With these assumptions, the retailer’s gross profit calculation is: net sales of $200,000 ($220,000 minus $20,000) minus its cost of goods sold of $140,000 = gross profit of $60,000.

Definition of Net Profit

The term net profit might have a variety of definitions. We will assume that net profit means a company’s net sales minus all expenses. The expenses include the cost of goods sold, the selling, general, and administrative (SG&A) expenses, and the nonoperating expenses and losses. Nonoperating revenues and gains would be an increase to the net profit. If the business is a regular corporation, net profit may mean after income tax expense.

Example of Net Profit

Assume that a sole proprietorship business had the following information for it most recent year:

  • net sales of $200,000
  • cost of goods sold of $140,000
  • selling, general and administrative expenses of $45,000
  • interest expense of $5,000

The company’s net profit was $10,000. The calculation is $200,000 minus $140,000 = gross profit of $60,000 minus $45,000 of SG&A expenses and $5,000 of interest expense = $10,000.

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