Definitions

profit loss account

Net profit

In business and finance accounting, net profit is equal to the gross profit minus overheads minus interest payable plus/minus one off items for a given time period (usually: accounting period).

A common synonym for "net profit" when discussing financial statements (which include a balance sheet and an income statement) is the bottom line. This term results from the traditional appearance of an income statement which shows all allocated revenues and expenses over a specified time period with the resulting summation on the bottom line of the report. Generally speaking, this term is synonymous with pre-tax profit.

In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations or endeavors. The bookkeeper or accountant must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.

Definitions of the term can however vary between the UK and US. In the US, net profit is often associated with net income or profit after tax (see table below).

The net margin percentage is a related ratio. This figure is calculated by dividing net profit by turnover, and it represents profitability, as a percentage.

Example

Here is how you reach net profit on a P&L (Profit & Loss) account:

  1. Sales Revenue = Price (of product) X Quantity Sold
  2. Gross profit = sales revenue – cost of sales and other direct costs
  3. Operating profit = Gross profit – overheads and other indirect costs
  4. Pre-tax profit or Net profit = operating profit - one off items and redundancy payments, staff restructuring – interest payable
  5. Profit after tax = Pre-tax profit – tax
  6. Retained or Net profit = Profit after tax – Dividends

See also

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