Net profit


Net profit
Accountancy
Key concepts
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Statement of financial position · Statement of cash flows · Statement of changes in equity · Statement of comprehensive income · Notes · MD&A · XBRL
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Net profit or net revenue is a measure of the profitability of a venture after accounting for all costs. In a survey of nearly 200 senior marketing managers, 91 percent responded that they found the "net profit" metric very useful.[1] In accounting, net profit is equal to the gross profit minus overheads minus interest payable for a given time period (usually: accounting period).[citation needed]

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 profit margin percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.

Contents

Purpose

How does a company decide whether it is successful or not? Probably the most common way is to look at the net profits of the business. Given that companies are collections of projects and markets, individual areas can be judged on how successful they are at adding to the corporate net profit.[1]

Construction

Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover.

Net profit ($) = Sales revenue ($) - Total costs ($)

Net profit is a measure of the fundamental profitability of the venture. It is the revenues of the activity less the costs of the activity. The main complication is when overhead needs to be allocated across ventures. Almost by definition, overheads are costs that cannot be directly tied to any specific project, product, or division. The classic example would be the cost of headquarters staff. Although it is theoretically possible to calculate profits for any sub-venture, such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs. Because overhead costs generally don’t come in neat packages, their allocation across ventures is not an exact science.[1]


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 (EBIT, earnings before interest and taxes) = Gross profit – overheads and other indirect costs−
  4. Pretax Profit (EBT, earnings before taxes) = operating profit – one off items and redundancy payments, staff restructuring – interest payable
  5. Net profit = Pre-tax profit – tax
  6. Retained earnings = Profit after tax – Dividends

See also

References

  1. ^ a b c Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN 0137058292. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language: Marketing Activities and Metrics Project.

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Look at other dictionaries:

  • net profit — net margin; = net profit margin The gross profit less all the other costs of an organization in addition to those included in the cost of sales. It is shown before and after taxation in the profit and loss account …   Accounting dictionary

  • net profit — net margin; net profit margin The gross profit less all the other costs of an organization in addition to those included in the cost of sales It is shown before and after taxation in the profit and loss account …   Big dictionary of business and management

  • net profit — ► NOUN ▪ the actual profit after working expenses have been paid …   English terms dictionary

  • net profit — index dividend, proceeds Burton s Legal Thesaurus. William C. Burton. 2006 …   Law dictionary

  • net profit — the remainder after all expenses of an accounting period are deducted from all revenue of the same period. Glossary of Business Terms * * * net profit net profit ➔ profit1 * * *    Trading profits after deducting the charges detailed in the… …   Financial and business terms

  • net profit — /net prɒfɪt/ noun the amount by which income from sales is larger than all expenditure. Also called profit after tax …   Dictionary of banking and finance

  • net profit — /net prɒfɪt/ noun the amount by which income from sales is larger than all expenditure …   Marketing dictionary in english

  • net profit — noun the excess of revenues over outlays in a given period of time (including depreciation and other non cash expenses) • Syn: ↑net income, ↑net, ↑lucre, ↑profit, ↑profits, ↑earnings • Derivationally related forms: ↑profiteer …   Useful english dictionary

  • net profit — the actual profit made on a business transaction, sale, etc., or during a specific period of business activity, after deducting all costs from gross receipts. [1660 70] * * * …   Universalium

  • net profit — final profit, amount of money that remains after taxes and other payments are deducted …   English contemporary dictionary


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