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 (net profit is 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.

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 profit = Profit after tax – Dividends

Gross profit

In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments. Note that this is different from operating profit (earnings before interest and taxes).

Net sales are calculated:

• Net sales = Sales – Sales returns and allowances.

Gross profit is found by deducting the cost of goods sold:

• Gross profit = Net sales – Cost of goods sold.

Gross profit should not be confused with net income:

• Net income = Gross profit – Total operating expenses.

Cost of goods sold is calculated differently for merchandising business than for a manufacturer.

Profit margin

Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.

•  Net Profit Margin = Net profit (after taxes) divided by Revenue X 100

The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss.

For example, a company produces a loaf of bread and sells it for £10. It cost the company £6 to produce the bread and it also had to pay an additional £2 in tax.

That makes the company's net income £2 (10 minus 6, before tax, then minus 2 for tax). Since its revenue is £10, the profit margin would be (2 / 10) or 20%.

Profit margin is an indicator of a company's pricing policies and its ability to control costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.

Revenue

In business, revenue or revenues is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Some companies also receive revenue from interest, dividends or royalties paid to them by other companies. Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in "Last year, Company X had revenue of £32 million."

In many countries, including the UK, revenue is referred to as turnover.

Profits or net income generally imply total revenue minus total expenses in a given period. In accounting and financial analysis, revenue is often referred to as the "top line" due to its position on the income statement at the very top. This is to be contrasted with the "bottom line" which denotes net income.

Investments such as stock shares in companies. For government, revenue includes gross proceeds from income taxes on companies and individuals, excise duties, customs duties, other taxes, sales of goods and services, dividends and interest.

In general usage, revenue is income received by an organization in the form of cash or cash equivalents. Sales revenue or revenues is income received from selling goods or services over a period of time. Tax revenue is income that a government receives from taxpayers.

In more formal usage, revenue is a calculation or estimation of periodic income based on a particular standard accounting practice or the rules established by a government or government agency. Two common accounting methods, cash basis accounting and accrual basis accounting, do not use the same process for measuring revenue. Corporations that offer shares for sale to the public are usually required by law to report revenue based on generally accepted accounting principles or International Financial Reporting Standards.

In a double-entry bookkeeping system, revenue accounts are general ledger accounts that are summarized periodically under the heading Revenue or Revenues on an income statement. Revenue account names describe the type of revenue, such as "Repair service revenue", "Rent revenue earned" or "Sales".

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