Hey there students nathan here from accounting university in today's video we'll be talking about the difference between gross profit net profit we're going to go through a huge step-by-step illustration of the difference let's get into it sales revenue we're always starting out .
With this on an income statement because with gross profit and net profit they are different and it's best to illustrate it with actual numbers here so on an income statement you always start with your sales revenue and here in this example it's 560 000. now after that you're going to deduct your biggest expense and we call that .
Cost of goods sold now sometimes it can be called cost of services sold really what that means is it's the cost of what it took to earn this revenue every time you make revenue you bring in income right or sorry more revenue right you bring in revenue to the business .
There's always a cost associated with that cost of goods sold usually if you're like a manufacturing business you make a physical product it's the cost of what that product was to you now we'll do a whole other video on cost of goods sold but that's what cost of .
Goods sold is and so you subtract that from your revenue that's your primary expense and when you subtract these two numbers together we're going to go and use an excel formula equals open parenthesis take your revenue subtract out cost of goods sold and you get 380 000. that's the .
Difference and that is what we call your gross profit now here a good note for gross profit means this gross is before you deduct major deductions what i mean by that all the other expenses that are involved it's the very .
First set of profit that you can actually bring in after you subtract your cost of goods sold and we call it gross profit because it just means more of a larger amount before you deduct that's what gross means and so gross profit in this example is 380. now with .
An income statement you're going to have a lot of operating expenses i only listed a few wages utilities depreciation insurance so we're just going to add these up here i'm going to do equals sum and then go ahead and highlight here and you're going to add up those .
Expenses now the next thing we're going to get is something called operating income and then you're going to take basically your gross profit and now you're deducting a lot more things so you take equals open parentheses gross profit minus your operating expenses .
Hit enter and now you're left with operating income then you have something called interest expense we got to subtract that too equals operating income minus 2600 278. now we have our income tax expense our income tax expense is 10 .
So we just take this number here and multiply it times 10. so equals take that number here multiply times that number up there and you get 27 890. now after you subtract your income tax expense from the income before income taxes .
It automatically calculated it to net profit so as you can see gross profits way up here before you subtract all these other expenses you only subtract cost of goods sold from it that's it but net profit it's everything else so net profit really is the final income number .
After all deductions are made at the very very end and i'll make both of these much larger so you can see it here so hopefully that kind of illustrates it as far as the difference gross profit is really before most expenses except for cost of goods sold or costs or services sold net profit is going to be after all the .
Deductions your final number the very very end which is that number there and then this example that was that number so that's the major difference between gross profit and net profit and hopefully that example really illustrates exactly the difference for .
You along with these definitions here so hopefully that was a helpful video i really hope you got a lot out of it now just as a reminder my accounting student accelerator my major course that has tons of test questions more videos like this and better videos .
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