Net profit gives a better picture of the profitability of a company. It is obtained by deducting the operating expenses from the gross profit of the company.
Net Profit = Gross Profit – Operating Expenses
So it may happen that both Company A and Company B has earned a total revenue or gross profit of Rs. 1000 lacs in this financial year. But the operating expenses incurred by Company A were Rs. 200 lacs and that incurred by Company B in that period was Rs. 400 lacs. From this we can infer that the net profit of Company A is more than that of Company B.
Apart from analyzing the true profit earned by the company, net income is also important as the company is taxed based on the net profit earned by that company.
Even salaried individuals can arrive at their net income by deducting costs incurred by them on conveyance, books, etc. And as per section 7(2) of Income Tax Act, the person will be taxed based on his net income. However, there is a ceiling on the maximum amount that can be considered for calculating the expenses towards conveyance, books, etc.
Net profit is also termed as net income or net earnings.
