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Difference Between Gross Profit, Operating Profit, And Net Income

Referencing Styles : MLA | Pages : 1

Gross Profit is referred to as the profit which is obtained from the difference of the cost of good sold and the sales which further appears in the income statement of the company. The cost of goods sold in the business comprises of the direct material, direct labour, equipment’s, utilities and many more. Gross profit helps to identify the profitability of the business out to the sales made by the business.

Operating profit of the company is referred to as the profit which is earned from the current business operation conducted. The operating profit is obtained from the differences of the operating revenue and the cost of goods sold, depreciation, amortization. The operating profit is served as the indicators of the potential of the business where all the expenses in that case is considered in the business. Operating profit of the business varies from year to year compared to the expectation of the firms profit in the business. The operating profit does not include the income related to the investment. The assets of sales which are the real estate and production equipment’s which are not considered as part of the core operation of the business.

Net income refers to the income earned by the company by meeting the expenses of the business. The difference between the gross profit and the expenses of the company is referred to as the net profit. The net profit of the business helps to understand the profitability position of the business. There are several advantages of the net profit of the business which provides assistances in order to determine the pay check of the business. The net profits helps to determine the return generated by the business out of the capital invested in that case. Implication of net profit plays significant role in case of the legal documents and the government forms. The net profit in that case further helps to understand the overall financial performance of the business.

The significant difference in the gross profit and net profit is that gross profit is obtained from the trading account of the income statement and net profit is obtained from the profit and loss account in the income statement of the company. The ratios can be calculated with the gross profit and the net profit margin of the company and further it help in the detailed analysis. It further helps in making the financial decision in that case. The profitability position of the business can be identified by evaluating the significant ratios which are the gross profit margin, net profit margin and the operating profit margin of the company. The net profit of the company comes out by deducting the operating expenses out of the gross profit of the company which is further shown in the income statement of the company.    

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