Difference between Gross profit and net profit

Difference between Gross profit and net profit

Gross profit is calculated by deducting cost of goods sold from the selling price. Where the net profit is calculated after the deducting the operating expenses i.e. administration, selling and financial expenses from the selling price.

It is important to note that net profit sometime called as operating profit because some organization clubs the selling, administration and financial expense into operating expenses.

1. Production Efficiency

Gross profit is a great measure of production efficiency of the entity. Gross profit ratio of the entity can be compared with another entity gross profit ratio or previous period ratio for measurement of efficiency of the production department.

2. Controlling cost

Net profit ratio is a useful tool to control the performance of selling and administration department.Net profit ratio is compared with other entities and previous year for measuring the performance and necessary control actions. Net profit ratio can be calculated by dividing net profit by sales.

Example of Gross profit and Net profit

	$
Sales	10,000
Less: Cost of Sales	(8,000)
Gross Profit	2,000
Less: Operating Expenses	(1,000)
Net Profit	1,000