# What is the difference between gross profit and net profit?

Author:
Harold Averkamp, CPA, MBA

## 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.

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