Net profit

From Wikipedia, the free encyclopedia

Net profit is an accounting term which is commonly used in business. It is equal to the gross profit minus overheads minus interest payable plus one off items for a given time period.

A common synonym for "net profit" when discussing financial reports (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.

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

Sales Revenue = Price (of product) X Quantity

Gross profit = sales revenue – cost of sales and other direct costs

Operating profit = Gross profit – overheads and other indirect costs

Pre-tax profit or Net profit = operating profit + one off items and redundancy payments, staff restructuring – interest payable

Profit after tax = Pre-tax profit – tax

Retained or Net profit = Profit after tax – Dividends