What Is Net Profit?
Formula, net profit margin, and a step-by-step example.
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Quick answerNet profit is the profit left after deducting all expenses, including cost of sales, operating expenses, interest and tax, from revenue. It is the “bottom line” of the income statement.
Net profit = Revenue − All expenses
| Net profit margin | Net profit ÷ Revenue × 100 |
|---|---|
| Also called | Net income, bottom line |
| Topic | Financial accounting · Profitability |
Net profit in plain English
Gross profit only removes the direct cost of goods. Net profit goes further and subtracts everything else the business paid to operate, borrow and pay tax. What remains belongs to the owners.
Worked example
| Revenue | 100,000 |
| Less: cost of goods sold | (60,000) |
| Gross profit | 40,000 |
|---|---|
| Less: operating expenses | (25,000) |
| Less: interest | (2,000) |
| Less: tax | (3,000) |
| Net profit | 10,000 |
Net profit margin = 10,000 ÷ 100,000 × 100 = 10%.
Common mistakes
- Confusing net profit with cash in the bank. Profit includes non-cash items and credit sales.
- Forgetting interest and tax when moving from gross to net profit.
Frequently asked questions
What is the difference between gross profit and net profit?
Gross profit deducts only the cost of goods sold. Net profit deducts all expenses.
Is net profit the same as net income?
Yes. Both refer to the bottom line after all expenses.
Where does net profit go?
It increases equity, either as retained earnings or as owner’s capital, unless paid out to owners.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.