Net profit definition

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What is Net Profit?

Net profit is the result after all expenses have been subtracted from revenues. This figure is the aggregate result of all operating and financing activities of an organization. As such, it is routinely relied upon by investors, creditors, and lenders to make decisions about how to deal with a firm. Net profit is also called the bottom line, because it is positioned at the bottom of the income statement.

How to Calculate Net Profit

To calculate net profit, subtract the cost of goods sold, operating expenses, financing costs, and tax costs from net revenues. The calculation is as follows:

Net revenues - Cost of goods sold - Operating expenses - Financing costs - Tax costs = Net profit

Example Calculation of Net Profit

A company reports the following for the year:

  • Net Revenues: $500,000

  • Cost of Goods Sold (COGS): $200,000

  • Operating Expenses: $100,000

  • Financing Costs (Interest Expense): $20,000

  • Income Tax Expense: $30,000

Based on this information, its net profit calculation is as follows:

Net profit = Net revenues − COGS − Operating expenses − Financing costs − Tax costs

Net Profit = $500,000 − $200,000 − $100,000 − $20,000 − $30,000 = $150,000

Therefore, the net profit is $150,000, representing the company’s earnings after all expenses have been deducted from revenue.

Related AccountingTools Courses

The Income Statement

The Interpretation of Financial Statements

Presentation of Net Profit

Net profit appears at the bottom of the income statement, after the cost of goods sold, operating expenses, financing costs, and income taxes. The presentation appears in the following exhibit, which contains a sample income statement.

FAQs

What is the difference between net profit and net cash flow?

Net profit is an accrual-based measure of earnings after deducting all expenses, including noncash items such as depreciation and amortization. Net cash flow measures the actual inflow and outflow of cash during a period. Differences arise from timing adjustments, working capital changes, and noncash accounting allocations.