Gross and net profit are terms that are used frequently in accounting. They’re also used everyday in life to describe many things. Although many people think they’re similar, they’re quite different.
Gross profit is the total amount of revenue minus what it costs to produce the product or service without deductions. For example, you make a product for $500 and sell it for $1,000, your gross profit is $500.
Net profit is gross profit minus deductions. For example, you sell $5,000 worth of merchandise, returns equal $200 and expenses are $1,000, then your net profit is $3,800.
Deductions are the items you deduct from gross profit to get net profit. Some of these are interest payments, overhead--such as rent and utilities--taxes and payroll.
The ratio of gross profit to revenue is gross profit margin. The gross profit margin is a percentage and is helpful in comparing similar companies in the same industry.
The ratio of net profit to revenue is net profit margin. The net profit margin is also a percentage, and if a company has a high net profit margin, it shows it has good control over its costs.