Overview:

Net Profit is the profit that the entity earned during the specific period of time from its operating activities after deducting the cost of goods sold and operating expenses.

Net profit is sometimes called net income or bottom line and it is recording in the entity income statement for a specific period of time. For example, in the income statement of ABC company for the period of 01 Jan to 31 December 2016, net income is USD 300K.

The different of net profit from gross profit is net profit is the result of gross profit less operating expenses.

Net Profit Margin:

The net profit margin is the percentage of net profit over net sales during the period. This margin is used to measure the whole cost that incurs in the entity for the period. For example, monthly, quarterly, and annually.

Those costs included the cost of goods sold and operating costs. The objective of the net profit margin is different from the gross profit margin.

Net profit margin assesses and measures the profitability and expenditures a whole while gross profit margin measures only profitability after deducting the cost of goods sold.

Net Profit Formula:

Calculation of net profit is very simple. As mention above, net profit is calculated by deducting the cost of goods sold and operating expenses from net sales that occurred during the period. Here is the formula.

  • Net Sales here are the sales that entity generated during the period after deducting all kind of discount and sales return. They are normally reporting on the first line of the income statement.
  • Cost of Goods Sold is the cost of goods or services associated with net sales. In the income statement, you can find these cost at the second line from net sales.
  • Operating cost or operating expenses are the expenses that incur for related to the operation. These costs included salary expenses for non-productions, depreciation expenses for non-production, transportation cost, admin cost, legal fee, and others related operating cost.
Related article  Single-step income statement: Definition, example, and template

Example:

For example, during the period ended 01 Jan 2016 to 31 December 2016, ABC company generate gross sales amount 1,000,000 USD, sales return 50,000 USD and sales discount 100,000 USD.

The cost of goods sold for this net sales was 300,000USD. The operating cost occurred during the year amount of 550,000 USD.

Based on this information, the net profit for ABC during the period is 300,000 USD (850,000 – 300,000 – 200,000 – 50,000). Net Sales 850,000 = 1,000,000 – 50,000 – 100,000. Noted: All of this information could be founded in the entity’s audited financial statements.

Here is what it looks like in income statement,