Definition of Gross Profit
Gross profit is defined as net sales minus the cost of goods sold.
Example of Gross Profit
Assume that a retailer had gross sales of $220,000 and sales returns and allowances of $20,000 during a recent year. Also assume that its cost of goods sold during the year amounted to $140,000. With these assumptions, the retailer’s gross profit calculation is: net sales of $200,000 ($220,000 minus $20,000) minus its cost of goods sold of $140,000 = gross profit of $60,000.
Definition of Net Profit
The term net profit might have a variety of definitions. We will assume that net profit means a company’s net sales minus all expenses. The expenses include the cost of goods sold, the selling, general, and administrative (SG&A) expenses, and the nonoperating expenses and losses. Nonoperating revenues and gains would be an increase to the net profit. If the business is a regular corporation, net profit may mean after income tax expense.
Example of Net Profit
Assume that a sole proprietorship business had the following information for it most recent year:
- net sales of $200,000
- cost of goods sold of $140,000
- selling, general and administrative expenses of $45,000
- interest expense of $5,000
The company’s net profit was $10,000. The calculation is $200,000 minus $140,000 = gross profit of $60,000 minus $45,000 of SG&A expenses and $5,000 of interest expense = $10,000.
