Starting a new business? Get 40% off our accountancy services for 3 months! 😀

x

When thinking about profit, the definition of it seems simple enough. That is until you realise there are two distinct types of profit – gross and net profit. The two are often confused, so we thought we’d write and article to explain as part of our series of accounting FAQs.

What is gross profit?

Gross profit is your business’ income minus the cost of goods sold (COGS). This is where it gets confusing, because it’s easy to mistake COGS and expenses.

The cost of goods sold, COGS, are not the same thing as business expenses. COGS refers to how much money you spend directly on making or acquiring the things that you sell.

Gross profit = Revenue – COGS

 

So, if you sell a book, your gross profit is the price which you sell it for, minus the wholesale price that you paid for it. The other expenses incurred in a business aren’t included when working out the gross profit, but they are for net profit.

Tax return services

What is net profit?

Net profits are what’s left from the money you make once the gross profit and all of the other allowable expenses have been deducted. Your expenses might include things like rent, marketing costs, stationery, tax, staff salaries, and so on. Your net profit is the money that you have really made.

Net profit is calculated by working out gross profit, and then deducting allowable expenses from it.

Net profit = Gross profit – Expenses

Why is it important to know gross and net profits?

Knowing both your gross and your net profit figures gives a clearer picture of how efficiently the business is operating. You could have a pretty high gross profit figure, but if you have a lot of expenses then your net profit will be much lower.

Knowing what’s happening in each area of the business will help focus attention on the areas that need it most. Beware the perils of taking action based on only your gross or net figures though. Base business decisions only on gross profit, and you could be in for a nasty surprise when it turns out you didn’t make as much as you thought.

Plus, gross and net profit figures are required in order to create income statements and fill in tax returns. Any confusion between the two can mean inaccurate statements, and some unwanted attention from HMRC.

Which profits do you pay tax on?

Whether you’re a limited company or sole trader, you’ll pay tax on your net profits. Get confused between these and your gross figures, and you’ll pay a lot more tax than you need to. Ouch.

Our professional team of experienced online accountants can you help you get your business’ finances into shape. Get an instant online quote, use our Live Chat button on your screen, or call an advisor on 020 3355 4047

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

More posts by this author
guest
0 Comments
Inline Feedbacks
View all comments

Read more posts...

Umbrella Companies for Self-Employed Contractors

When you set up in business as a contractor you might either work as a sole trader or as a limited company….

Read More

Get Ready for Small Business Saturday UK 2022

Small Business Saturday started in the US in 2010, on the first Saturday following Thanksgiving. It aims to encourage shoppers to consider…

Read More

Architects and Tax

Architecture is a highly diverse sector when it comes to tax. It’s partly down to the type of businesses that carry out…

Read More
Back to Blog...

Confirm Transactions

The number of monthly transactions you have entered based on your turnover seem high. A transaction is one bookkeeping entry such as a sale, purchase, payment or receipt. Are you sure this is correct?

Yes, submit my quote
No, let me change it

Please contact our sales team if you’re unsure

VAT Returns

It is unlikely you will need this service, unless you are voluntarily registered for VAT.

Are you sure this is correct?

Yes, the business is VAT registered
No, let me change it

Call us on 020 3355 4047 if you’re not sure.

Bookkeeping

You only need this service if you want us to complete the bookkeeping on your behalf.

Would you prefer to complete your own bookkeeping?

Yes
No

Call us on 020 3355 4047 if you’re not sure.