gross concept of income accounting changed to net concept by
Answers
Explanation:
Gross Profit is an item in Trading Account of your company. It is deduced after subtracting the sum of purchases and direct expenses from sales. This means that Gross Profit is the difference between net sales revenue and cost of sales. Cost of sales includes expenses directly related with manufacturing goods or rendering services. These expenses relate with manufacturing, purchase of goods and activities that help in bringing goods to the point of sale. Such expenses include raw material cost, carriage inwards, wages, freight inwards etc. Thus, Gross Profit demonstrates the efficiency of the business in making use of its labor, raw material and other supplies.
On the other hand, Net Profit is an important measure to determine a company’s profitability. It is usually referred to as ‘the bottom line’ of the income statement. Therefore, Net Profit is the difference between Gross Profit and sum of operating and non-operating expenses, taxes and preferred stock dividends. It is one of the components of your business’ profit and loss account. Now, the Net Profit helps both the internal and external stakeholders in making various decisions regarding your business. It helps internal stakeholders like top management to take managerial decisions. Whereas, it makes external stakeholders like investors and creditors aware about the earning capability of your business
Gross Profit Formula and Net Profit Formula
As mentioned above, Gross Profit is the excess of sales over cost of sales. That it is the difference between total sales and the cost of goods sold. Therefore , the formula for Gross Profit is:
Gross Profit = Net Sales – Cost of Goods Sold
or
Gross Profit = Net Sales – (Purchases + Direct Expenses)
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What is Gross Profit Formula?
Where cost of goods sold is refer to the direct costs that are incurred to produce goods or render services with the purpose of selling them. Such cost includes the cost of materials and direct labor costs incurred in producing goods.
On the other hand, the formula for Net Profit is as under:
Net Profit = Gross Profit + Other Incomes – Indirect Expenses
Or
Net Profit = Gross Profit – Operating Expenses + Operating Incomes – Non-Operating Expenses + Non-Operating Incomes – Taxes
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