What is the difference between gross profit and net profit?

The distinction between gross profit and net profit is crucial in financial analysis and reporting. Gross profit represents the revenue generated from sales after deducting the direct costs associated with producing those goods or services, known as the cost of goods sold (COGS). This measurement focuses on the profitability of core business activities without considering operating expenses, taxes, interest, or other non-operational costs.

On the other hand, net profit is a more comprehensive measure of profitability. It calculates what remains after all expenses are subtracted from total revenue. This includes not just COGS, but also operating expenses (like rent and salaries), interest, taxes, and any other expenses that the company incurs. Therefore, net profit provides a clearer picture of the overall financial health of a business, encompassing all aspects of its operations.

In this context, defining gross profit as sales revenue minus COGS and net profit as total revenue minus total expenses accurately captures the nuances of these two important financial metrics.