What is Net Profit: Definition, Types, Benefits, and How to Calculate It

In business, calculating a profit is a common thing to do. All company activities will eventually be included in the profit or loss in the financial statements. It is better if the company earns a profit within a certain period. Profit is obtained from the income minus the production costs generated by the company.

Maybe everyone is familiar with the term profit. However, there is one other term regarding profit, namely net income. What is net income? This time we will review the meaning of net income, its types, benefits, and how to calculate it. Let’s see the review below.

Understanding Net Profit

Before knowing net income, we should first know what profit is. Profit is the company’s income that exceeds the amount of capital issued in the production process.

Meanwhile, net profit is the profit earned by the company after deducting taxes. This profit is the profit obtained by the company from the reduction of income minus expenses and costs that taxes have deducted.

Net profit is calculated based on transactions that occurred in a certain period. Net profit is obtained from the company’s sale and purchase transactions.

Types of Profit

Profit has four types, including:

1. Gross profit

Gross profit is a company’s income that has not been deducted from other costs such as labour, employee salaries, interest, and taxes. Some profits and costs can be used to finance production in gross profit.

2. Net Profit

As explained earlier, net income is the profit earned by the company after deducting taxes.

3. Operating Profit

Profit This one profit is the profit obtained from the company’s ongoing operational activities. Operating profit is calculated from gross profit minus the company’s operating costs.

4. Profit Before Tax

Profit before tax is the profit earned by the company before being deducted by various tax costs the company must pay. Profit before tax shows how much profit the company receives from its operational activities without tax costs. For this reason, profit before tax is also often referred to as operating profit.

Benefits of Calculating Net Profits

Calculation of net income in the company is not without benefits. The benefits of calculating a company’s net profit include:

• Net profit is a company reserve fund that can be useful in meeting the company’s investment, development or emergency fund needs.
• Net income as a source of funds in paying the company’s debts.
• Net profit as a source of funds to finance the company’s operational activities.
• From the benefits of net income, it can be concluded that a company will try as hard as possible to generate profits to improve its quality and maintain its image in the eyes of stakeholders, investors, and shareholders.

In addition, net income can make it easier for companies to make decisions and predict the company sustainability in the next few years.

Elements of the Company’s Net Profit

In calculating the company’s net profit, the main principle used by the company is gross profit minus operating expenses. It is important to note that to determine the value of profit. Several elements need to be known and explained: gross profit, cost of goods sold, revenue, operating expenses, and other income.

Gross profit is obtained from calculating net sales minus the cost of goods sold. And the company’s net sales can be obtained from gross sales minus transportation costs, discount costs, and selling costs.

The difference between gross profit and operating expenses is obtained from these results. Operating expenses can be in the form of expenses and costs that can be used for operational and non-operating company expenses. The operational costs are costs incurred by the company to meet its operational needs, such as administrative costs, marketing costs, rental costs, and transportation costs.

How to Calculate Net Profit

To calculate net income, we need to know the calculation formula first. Three terms need to be observed in estimating net income: EBITDA, EBT and EBIT.

• EBITDA

EBITDA is earnings before interest, before taxes, before depreciation, and before amortisation. EBITDA is obtained from the calculation of interest expense less operating expenses.

• EBT (Earning Before Tax)

EBT is profit before tax obtained from the calculation of the sum of interest expense and interest income then reduced by gain before tax and interest.

• EBIT (Earning Before Interest and Tax)

EBIT is profit before interest and tax obtained from calculating profit value before tax less interest, depreciation, amortisation, depreciation expense, and amortisation.

That explains the meaning of net income, its types, benefits, and how to calculate it. Hopefully, this article can add insight into net income.