What's the difference between gross and net profit in final accounts?

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, while net profit is the actual profit after all expenses are deducted.

Gross profit, also known as gross income or sales profit, is calculated by subtracting the cost of goods sold (COGS) from the total revenue. The COGS includes all the direct costs associated with the production of the goods sold by the company. This includes the cost of raw materials, direct labour costs and other direct costs related to the production of goods. Gross profit is a measure of a company's efficiency in turning raw materials into income; the higher the gross profit, the better.

On the other hand, net profit, also known as net income or bottom line, is a measure of the profitability of a venture after accounting for all costs and taxes. It is calculated by subtracting all the company's expenses, including operating expenses, interest, and taxes, from its total revenue. Operating expenses include rent, utilities, salaries, and other day-to-day operational costs. Interest expenses are the costs of borrowing, while taxes are self-explanatory.

Net profit is the actual profit the company makes after all costs, not just those directly related to the production of goods. It's the amount that could be distributed to shareholders if the company decided to distribute all of it. Therefore, net profit is a more accurate measure of a company's profitability and financial health.

In summary, while gross profit only considers the costs directly related to the production of goods, net profit takes into account all expenses, making it a more comprehensive measure of profitability. Both are important indicators of a company's financial health and are used by investors, creditors, and other stakeholders to assess the company's financial performance and make decisions.