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What is gross profit and net profit?


You often hear about gross profit and net profit. I think there is also something called gross salary and net salary.

Can you please tell me what gross and net profit is and what the difference is between them?
Posted in Business & Commerce, asked by lefe, 4 years ago. 1216 hits.

0

There is a difference between gross profit and net profit. As well as a difference between gross salary and net salary.

Let's consider gross and net profit first. In a business's financial records, there is a report called the Income Statement. This statement combines all the business's income and expenses for the year and works out the tax to be paid and any over all profit or loss. It follows the following format:

Sales/service revenue
Less: Cost of goods sold
= Gross profit
Add: Other income (e.g. rent income, interest income, commission revenue, etc)
Less: Operating expenses (e.g. rent expense, salaries and wages, interest expense, telephone expense, etc)
= Net profit before tax
Less: Taxation expense
= Net profit after tax

At the top, you see the figure "gross profit".

This amount is the profit earned from your trading operations i.e. all revenue earned from sales of your inventories or services, less expenses incurred in providing those services or producing or purchasing the inventories. These expense form the line item "cost of goods sold". The expenses which can be included in this figure are labour, raw materials and overheads such as rent or electricity for the factory. An item such as rent of the admin offices on the other hand can not be included as this does not form part of process of preparing the goods for sale.

The gross profit gives a good indication of how the business is performing on it's primary operations before all other expenses are taken into account.

The remaining operating expenses are then deducted from gross profit, and any other income added, to get to the net profit figure. Once tax has also been deducted, the final net profit is the amount that the company has made for the year.

This is a similar concept when looking at gross and net salary.

As an employee, you sign a contract with your employer which states the gross salary you will receive, e.g. $76,000 pa. This is usually a yearly amount i.e. per annum (pa). On your salary slip, you will notice a number of deductions which could include PAYG (pay as you go tax), private health insurance, superannuation deductions, etc. You are then left with a total which is the amount you actually get paid out in cash. This is your net salary.

Example:

You may see the following on your salary slip-

Gross salary: $1,250
Less-
PAYG: $225
Private health insurance: $18
Superannuation deduction: $125
Net salary: $882

The $882 is the amount you would expect to see in your bank account.

admin
4 years ago
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