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what is net profit, what is gross income, what is profit margin, what is revenue

what is net profit ?                                                                                                                                                                                            what is gross income?

what is profit argin ?
asked May 1, 2014 in Terminology in Accounts by shellyv (4 points) 263 views

1 Answer

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Gross Profit:  When we subtract from Net Sales Cost of Goods sold, we get Gross Profit and sometimes it is also called gross income.  Now what is Cost of Goods sold?  Cost of Goods Sold means the cost incurred on those goods which have been sold.  It includes the cost of material, labour and other factory expenses.

Example: A buys 10 units of a raw material to produce an item for Rs.100 and spends Rs.20 on labour and Rs.30 on other factory overheads.  The total cost of 10 units come to Rs.150.  So the cost of each unit is 150/10 = Rs.15.  Now out of these 10 units A sells 8 units for Rs.160.  What is gross profit? Gross Profit = Net Sales - Cost of Goods Sold.  Rs.40 = Rs.160 - Rs.120.   Since out of 10 only 8 units have been sold hence cost of goods sold is 15 x 8 = 120.  2 unsold units will constitute closing stock at Rs.30.

Net Profit:  When we subtract from Gross Profit administrative and sales expenses and other incomes, we get net profit.

Example.  In the above example if firm's administrative and sales expenses are Rs.10 and it has also earned an income of Rs.5 on account of interest on investments, its net profit will be Rs.35 = Rs.40 - Rs.10 + Rs. 5.

Profit Margin: This is actually a measure of profitability of a firm's business.  It shows what percentage the firm earns on it's sales.  For example in our case the profit margin will be:  (Net Profit/Net Sales)x100

(35/160) x 100 =  21.88%  This means only every sale of Rs.100 the company makes a net profit of Rs.21.88.

Revenue: Revenue is the amount received by the business from selling it's main goods or services to its customers during a given period. In simple words you can say that net sales of a business are it's revenue. For example, a book seller's real business is selling books. Whatever amount he receives from the customers on selling books will be his revenue.

answered May 1, 2014 by jbsclasses (3,969 points)
love the answers its clear
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