Business Studies – 5.3.1 What is profit and why it is important | e-Consult
5.3.1 What is profit and why it is important (1 questions)
Gross Profit vs. Net Profit
Gross Profit is the profit a business makes after deducting the cost of goods sold (COGS) from its revenue. COGS includes the direct costs of producing goods or services, such as raw materials and direct labor. It essentially shows how efficiently a business is producing its products.
Net Profit is the profit a business makes after deducting all expenses, including COGS, operating expenses (e.g., rent, salaries, utilities), interest, and taxes, from its revenue. It represents the overall profitability of the business.
Example:
| Revenue | £100,000 |
| Cost of Goods Sold (COGS) | £40,000 |
| Gross Profit | £60,000 |
| Operating Expenses | £20,000 |
| Interest | £2,000 |
| Taxes | £5,000 |
| Net Profit | £23,000 |
In this example, the gross profit is £60,000, while the net profit is £23,000. The net profit is lower because it accounts for all the business's expenses, not just the direct costs of producing goods.