Difference between Gross and Net Profit

Gross and net profit both are important terms although latter is given more importance by the top management and the analysts while analyzing the financial statements of the company because it is used for calculating important ratios like earning per share, price to market ratio and so on. However one should know the difference between the two in order to fully understand both the terms better, let’s look at some of the differences between the two –

  1. Gross profit is calculated by deducting the cost of goods sold from net sales done by the company whereas net profit is calculated by deducting all expenses from gross profit.
  2. Gross profit figure comes under debit side of trading account while net profit figure comes under debit side of profit and loss account.
  3. Calculation of gross profit is simple because there are only few adjustments however calculation of net profit is complex as it requires adjustments for items like outstanding expense, deprecation, unearned income, income tax, proposed dividend and other such adjustments.
  4. Gross revenue figure is always higher because it is calculated first and then from that figure net revenue is calculated resulting in lower amount for the same.

In order to form a better opinion about the results of the company one should look at both the figures because if one looks only gross or net revenue than he or she may miss some information which can result in wrong interpretation about the company’s financial health.

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