The profit that a financial institution reports is the financial gain it has made from its undertakings after considering its expenses, costs and relevant taxes. If you are thinking of investing in a company, you might find it necessary to evaluate the company’s financial position by looking at its gross profit and net profit or income. Understanding the difference between these two commonly used terms is therefore important in describing the profitability of a company.
Gross Profit is the total amount of revenue a company generates after selling its products and services, less the cost that was incurred in producing and selling those products and services. It is defined as the cost of sales/goods. It is also called gross income/margin.
Net Income (or net profit) is the total earnings of a company. The figure is arrived at by subtracting all the company’s expenses from revenue collected from sale of products and services as well as all other incomes in a specified period, usually a year.
For a salaried individual, gross income is that amount an employer pays you, prior to making any deductions. Net income for such an individual will be the amount of salary received after making all deductions such as taxes and various contributions such as retirement and medical plans.
|Gross Profit||Net Income|
|Typically found in the first part of a company’s income statement||Typically the last item on a company’s income statement|
|Equal to total sales minus cost of goods sold||Equal to gross profit minus operating expenses|
The difference is how they are arrived at and their implications or what they indicate.
- Gross profit is the difference between a company’s net revenues less the cost of goods sold. You take the revenue from total sales, and subtract the cost of the goods that were sold for that specific period. Cost of goods sold is the total monies incurred in producing and selling goods and services. This includes fuel, shipping, raw materials, wages, and any other expenses incurred in the direct production of the goods and services. It is the typically the first item on a company’s income statement.
- Net profit, on the other hand, is the difference between gross profit and operating expenses and taxes. It is calculated as gross profit minus operating expenses and taxes. It is typically found at the bottom of a company’s income statement.
- Gross profit provides insight as to how effective and efficient the management is in utilizing the company’s resources and expenses that are directly linked to producing and selling products and services.
- Net income is compared with the previous year’s figures to help determine the general profitability of the company over time, and also gauge the overall performance of the managers of the company. It is also used to calculate the earnings per share of a company. This is an important indicator for stock investors as it can be used to rate the company’s stock performance against similar players in the industry.
Watch this video for more information on gross profit and net income: