What does net profit mean?
Net profit, also known as net income, is the total earnings of a business after all costs are deducted. Taxes, depreciation, and the expenses of running a regular business are among the expenses deducted. A company’s net profit, also known as its “bottom line,” is a reliable gauge of its profitability.
Although the definition of net profit is essentially the same as net income, there are some differences in how different organizations use it. “Net profit” might be used with regard to “net profit after taxes” on a financial statement. It distinguishes between things considering and ignoring taxes while maintaining terminology consistency. This is because the general word “profit” is tallied at separate times in a company’s financial reporting with different qualifiers.
Use this net profit formula:
Total Revenue – (Total Expenses + Taxes + Depreciation) = Net Profit
What is difference between gross profit and net profit?
Gross profit is the amount of money you are left with after deducting the cost of goods sold from revenue. Net profit reflects the amount of money you are left with after having paid all your allowable business expenses.
Gross Profit vs. Net Profit
- Gross Profit:
- Calculation: Total Revenue – Cost of Goods Sold (COGS)
- Focuses on the efficiency of production and sales.
- Does not include operating expenses, taxes, interest, or depreciation.
- Net Profit:
- Calculation: Total Revenue – (COGS + Operating Expenses + Taxes + Interest + Depreciation)
- Provides a comprehensive view of a company’s financial performance.
- Reflects the actual profit after all business costs are deducted.
Gross profit is the profitability of business activities, while net profit shows the overall profitability after all expenses.
Does a business pay tax on gross profit or net profit?
A business pays taxes on net profit; meaning the total money received from customers (gross income) subtracted by all business expenses and costs of good sold. What is left is the taxable income for the business. Taxes are calculated based on this net income.
