1.2 Gross Profit and Net Profit

One of the most important uses of statements of profit or loss is that of comparing the results obtained with the results expected． We will see the profit calculated is split into two sections—one in which the gross profit is found and the next section in which the net profit is calculated．

1.Gross Profit

The first stage in the determination of the profit for the year involves calculating gross profit． The gross profit for a given period is computed by subtracting the cost of goods sold （or cost of sales） from sales revenue． Gross profit is calculated as：

Worked Example 1.1

Calculate the gross profit or gross loss of each of the following businesses in Exhibit 1.2：

Solution

Sales－Cost of goods ＝Gross profit／ （Gross loss）

Business A：￡ 10，676 －￡ 9，820 ＝ ￡ 856

Business B：￡ 14，307 －￡ 7，530 ＝ ￡ 6，777

Business C：￡ 19，370 －￡ 10，500 ＝ ￡ 8，870

Business D：￡ 9，350 －￡ 9，580 ＝ ￡ （230）

Business E：￡ 17，200 －￡ 8，760 ＝ ￡ 8，440

It is important to appreciate that the cost of goods sold is not usually the same as the amount of purchases． This is because most businesses will have purchased goods that are unsold at the end of the accounting period． These goods are referred to as inventory ．The cost of inventory unsold is carried forward into the next accounting period to be matched against the income that it generates （matching concept）， by being transferred to the statement of financial position at the end of the year．

A manufacturing business will have a number of different types of inventories． However，for simplicity， the following exposition is confined to non-manufacturing businesses whose inventory consists of goods purchased for resale that have not undergone any further processing by the entity．

2.Net Profit

Net profit， found in the profit and loss account section of the statement of profit or loss，consists of the gross profit plus any revenue other than that from sales， such as rents received or commissions earned， less the total costs used up during the period other than those already included in the ‘cost of goods sold’． Where the costs used up exceed the gross profit plus other revenue， the result is said to be a net loss．Net profit is calculated as：

Worked Example 1.2

Using the answer of example 1.1， calculate the net profit／ loss in Exhibit 1.3：

Solution

Gross profit／ （Gross loss） ＋ Other revenues － Expenses ＝ Net profit／ （Net loss）

Business A：￡ 856 －￡ 2，622 ＝ ￡ （1，766）

Business B：￡ 6，777 ＋ ￡ 4，280 －￡ 2，800 ＝ ￡ 8，257

Business C：￡ 8，870 ＋ ￡ 500 －￡ 2，500 ＝ ￡ 6，870

Business D：￡ （230）－￡ 1，780 ＝ ￡ （2，010）

Business E：￡ 8，440 ＋ ￡ 3，260 －￡ 2，440 ＝ ￡ 9，260 CgxS5/uZUG4Uvk2Dc+H/lbacLzqs56PesLmbfde1vRCLSnlThVltMHJfhXna3lmW