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Difference between Gross Profit and Net Profit

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The following article will update you about the difference between gross profit and net profit.

In this connection it is important to distinguish between gross profit and net profit. Gross profit is nothing but the difference between revenue and cost and this is identical to accounting profit shown in the profit and loss account of a firm.

But, for the calculation of net profit, we have to deduct certain items like:

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(a) Prices of factors — like capital, land, etc. — which are supplied by the entrepreneur himself.

(b) Wages of routine management, i.e., wage part of profit.

(c) Selling cost or advertisement cost, if any, incurred in order to promote sales.

(d) Dividends paid to shareholders in case of joint stock companies or corporations.

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(e) Depreciation reserves set aside by the business firms.

Writes Samuelson:

“Much of what is ordinarily called profit is really nothing but interest, rent, and wages under different names. Implicit interest, implicit rent, and implicit wages are the names economists give to this part of profit, i.e., to the earnings of self-used factors.” So profit can be taken to be the sum-total of implicit factor returns.

In short, “Wages, rent and interest may be looked on as a reward for the corresponding factors of production, labour, land and money (or capital), but it has always proved difficult to isolate a specific factor of production to which profit may be said to accrue as a reward.”

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“Profit”, said Taussig, “is a mixed and a vexed income.” It is a ‘mixed’ income because the entrepreneur gets his earning from a variety of sources. It is a ‘vexed’ income because economists are not agreed as to which of these earnings should be included within the definition of profit and what determines the quantum of such earnings.

The term Profit may be used in a narrow sense to include only the income attributable to the exercise of a purely entrepreneurial function like risk-taking, uncertainty-bearing or innovation. The term may also be used in a wide sense to include the whole of the residue remaining with the enterprise after meeting all expenses.

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