Difference between Gross Profit and Net Profit Difference between Gross Profit and Net Profit

Difference between Gross Profit and Net Profit

 Difference between Gross Profit and Net Profit

Gross profit and Net Profit difference

Gross Profit Vs Net Profit

The differences between Gross Profit and Net profit are discussed below.

S. N

Basis of Difference

Gross Profit

Net Profit

1

Definition

Gross profit also known as Business Profit is the difference between Total Revenue and explicit Costs.

Net Profit also known as Economic Profit or Pure Profit is the difference between Total Revenue and Total Costs (both explicit and implicit costs).

2

Inclusion of Implicit costs

It does not include implicit costs.

It includes both explicit and implicit costs.

3

Dimension

It is a narrow concept as it is a part of Net Profit.

It is a broad concept as it includes Gross profit.

4

Constituents

Its constituents are rent, wages, interest, depreciation, etc.

Its constituents are a reward for bearing risk and uncertainties, ability and innovations, monopoly and windfall gains, etc.

5

Existence under Perfect Competition

A portion of gross profit exists under perfect competition.

None of the portion of net profit exists under perfect competition.

6

Profit and Loss Estimation

Actual loss or profit cannot be estimated under gross profit.

Actual profit or loss can be estimated under net profit.

7

Objective

The objective of Gross profit is to estimate the profitability of a company.

The objective of Net profit is to show the financial performance of a company.

8

Credit balance

It shows the credit balance of the Trading account.

It shows the credit balance of the profit and loss account.

9

Formula

·        GP = Total Revenue – Cost of Goods Sold

 

Cost of Goods sold includes:

a.      Direct materials, such as raw materials and inventory

b.      Direct labor, such as wages for production workers

c.      Equipment costs that are used in production

d.      Repairing costs of equipment

e.      Utilities for production facilities

f.       Shipping costs, etc.

 

·        GP = Total Revenue – Explicit Costs

·        NP = Total Revenue – Total Costs

·        NP = Total Revenue – (Explicit costs + Implicit costs)

·        NP = GP – Implicit Costs

·        NP = GP — Operating Expenses — Other Business Expenses — Taxes — Interest on Debt + Other Income


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