What is the Difference Between Net Profit and Operating Profit?


Difference Between Net Profit and Operating Profit

The term “profit” is divided into different types according to the source of benefit and the stage at which it is calculated during the life-cycle of a business. This article illustrates the difference between net profit and operating profit.

Some of the most common forms of profit that can be found in the financial statements are gross profit, net profit, operating profit, etc. All of them calculated for different reasons and each plays a diverse role in their journey through the accounting cycle.

 

Net Profit

The word Net means “after all deductions”. Accordingly, profit earned after all deductions is called Net Profit. It is also called Net Income or Net Earnings. It is the difference between “total revenue earned” and “total cost incurred”.

Deductions include adjustments related to the cost of doing business such as taxes, depreciation and other miscellaneous expenses.

Net Profit = Total Revenue – Total Cost

Net Profit = Gross Profit – (Total expenses from operations, interests and taxes)

Net profit can be found on a company’s income statement & it is further transferred to the organization’s balance sheet. (Add to capital)

Net profit shown in the financial statements
Net Profit Shown on the Income Statement

Operating Profit

Profit earned from a firm’s core business operations is called Operating Profit. So a shoe company’s operating profit will be the profit earned only from selling shoes. Operating profit doesn’t include any profits earned from investments and interests. It is also known as Operating Income, PBIT and EBIT (Earnings before Interest and Taxes).

It is the excess of Gross Profit over Operating Expenses.

Operating Profit = Gross Profit – Operating Expenses

Operating Profit = Net Profit – Non-Operating Expenses – Non-Operating Income

 

Example of Net Profit vs Operating Profit

Calculate both operating and net profit from the below information.

ParticularsAmtParticularsAmt
Gross Profit2,00,000Interest on Loans35,000
Carriage Outwards15,000Interest on Investments10,000
Advertising17,000Printing and Stationery3,000
Salaries40,000Loss on Sale of Furniture9,000
Rent37,000General Expenses10,000
Lighting11,000Donation4,000

Solution:

Add Gross Profit 2,00,000
Operating Profit = Gross Profit – Operating Expenses­
Less Carriage Outwards (15,000)
Less Advertising (17,000)
Less Salaries (40,000)
Less Rent (37,000)
Less Lighting (11,000)
Less Printing and Stationery (3,000)
Less General Expenses (10,000)
Operating Expenses (1,33,000)
2,00,000 – 1,33,000
Operating Profit 67,000
Total Revenue (Operating + Non-Operating Income)
Add Gross Profit 2,00,000
Add Interest on Investments 10,000
Total Revenue 2,10,000
Net Profit = Total Revenue – Total Cost
Total Cost (Operating + Non-Operating Expenses)
Less Operating Expenses  (1,33,000)
Less Non-Operating Expenses
Interest on Loans (35,000)
Loss on Sale of Furniture (9,000)
Donation (4,000)
Total Cost (1,81,000)
2,10,000 – 1,81,000
Net Profit 29,000

One of the main points of difference between net profit and operating profit is that net profit takes into account earnings from all sources & all sorts of deductions whereas operating profit only considers profits earned from operations.

 

>Read Difference between Gross Profit and Operating Profit