Net Profit VS 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)

Related Topic – Difference Between Revenue and Profit

 

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.

Particulars	Amt	Particulars	Amt
Gross Profit	2,00,000	Interest on Loans	35,000
Carriage Outwards	15,000	Interest on Investments	10,000
Advertising	17,000	Printing and Stationery	3,000
Salaries	40,000	Loss on Sale of Furniture	9,000
Rent	37,000	General Expenses	10,000
Lighting	11,000	Donation	4,000

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

Related Topic – Journal Entry for Profit on Sale of Fixed Assets

 

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.

 

Short Quiz for Self-Evaluation

 

>Read Difference between Gross Profit and Operating Profit

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