Accounting & Finance On Computers

Construction & Analysis of Profit & Loss Account

Profit

Q. Explain the following:

Gross Profit
Operating Profit (June 01)
Net Profit (June 02)

Gross Profit

Gross Profit is obtained by subtracting the cost of goods sold from Net sales.

Gross Profit = Net Sales – Cost of Goods Sold
Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock
And Net Sales = Total Sales – Sales Return

Operating Profit (June 01)

Operating Profit means profit earned by the concern from its business operation and not from the other sources. While calculating the net profit of the concern all incomes either they are not part of the business operation like Rent from tenants, Interest on Investment etc. are added and all non-operating expenses are deducted. So, while calculating operating profit these all are ignored and the concern comes to know about its business income from its business operations.

Operating Profit = Gross Profit – Operating Expenses
Or Operating Profit = Net Profit + Non Operating Expenses – Non Operating Incomes
And Net Sales = Total Sales – Sales Return

Net Profit (June 02)

This is the amount ultimately available to the company for appropriation. This amount could be either distributed as dividends to shareholders or retained in the business as retained earnings. This is variously referred to as PAT (Profit after tax) or EAT (Earnings after tax). After subtracting dividends declared, and surplus remaining is added to retained earnings, that is, reserves & surplus.

Net Profit = Gross Profit – Selling and Distribution Expenses – Office and Administration Expenses – Financial Expenses – Non Operating Expenses + Non Operating Incomes.
And Net Sales = Total Sales – Sales Return

Q. Distinguish between gross profit, operating profit, & net profit. (June 99, June 98)

Please refer to the previous question for details.

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