Difference Between Gross Profit and Net Profit

What is Gross Profit?

Gross profit is the amount a company makes after the deduction of the cost directly incurred from the production or purchase of the product from its sales. It demonstrates how much money the company is earning after its main business activities have been subtracted from the total revenue, such as making or selling goods but not including other costs such as rent, salaries or taxes. It’s like looking at how much money you make from selling lemonade after you’ve paid for lemons, sugar, and cups, but before considering other expenses like advertising or utilities.

The formula to calculate gross profit:

Gross Profit = Revenue − Cost of Goods Sold (COGS)

What is Net Profit?

Net profit is the money that a company has got after paying for all the expenses that are necessary to run the business. It presents a full picture of company profitability by taking into account all costs, including not only the direct costs of production or acquiring the goods but also indirect costs.

The formula to calculate net profit is:

Net Profit = Total Revenue − Total Expenses

Gross Profit Vs Net Profit

Aspect	Gross Profit	Net Profit
Definition	The difference between revenue and COGS	The difference between total revenue and total expenses.
Calculation	Gross Profit = Revenue – Cost of Goods Sold	Net Profit = Total Revenue – Total Expenses
Scope	Focuses only on direct costs of production	Includes all expenses, including operating expenses, interest, taxes, and depreciation
Components	Includes revenue and COGS	Includes total revenue and all expenses
Importance	Measures profitability at the production level	Measures overall profitability after all expenses
Financial Health	Provides insight into the efficiency of production and pricing strategy	Reflects the overall financial health and performance of the company

Example:

Let’s say a company sells handmade crafts

• Total revenue (sales): ₹100,000
• Cost of goods sold (COGS): ₹60,000
• Operating expenses (salaries, rent, utilities, etc.): ₹20,000
• Interest on loans: ₹5,000
• Taxes: ₹10,000
• Depreciation: ₹3,000

Using these numbers, we can calculate the gross profit and net profit:

• Gross Profit: Gross Profit = Total Revenue – Cost of Goods Sold (COGS)

= ₹100,000 – ₹60,000
= ₹40,000

So, the company’s gross profit is ₹40,000.

• Net Profit: Net Profit = Total Revenue – Total Expenses
  = ₹100,000 – (₹60,000 + ₹20,000 + ₹5,000 + ₹10,000 + ₹3,000)
  = ₹100,000 – ₹98,000
  = ₹2,000

So, the company’s net profit is ₹2,000.

In this example, gross profit represents the amount of money the company earns from selling its crafts after deducting the direct costs of producing them (COGS). Net profit, on the other hand, reflects the company’s overall profitability after accounting for all expenses, including operating expenses, interest, taxes, and depreciation.

Jahnavi Pulluri

Content Writer

A writer by profession and a music lover at heart, Jahnavi crafts simple, engaging content around employee management and workplace culture. She enjoys turning complex topics into clear and creative stories that connect with readers. When the words go quiet, she's either strumming her guitar, lost in music, or giving in to her soft spot for cake and ice cream.