Accounting explained
Gross Profit vs Net Profit: Meaning, Format and Example
Gross profit tells you whether you buy and price well. Net profit tells you whether the shop as a whole makes money after rent, salaries and everything else. A shop can have a healthy gross profit and still make a loss.
The formulas
| Measure | Formula |
|---|---|
| Gross profit | Sales − cost of goods sold |
| Gross profit margin | Gross profit ÷ sales × 100 |
| Net profit | Gross profit − operating expenses (rent, salary, electricity, depreciation…) + other income |
| Net profit margin | Net profit ÷ sales × 100 |
Worked example: Sri Lakshmi Stores, 2025-26
| ₹ | % of sales | |
|---|---|---|
| Sales | 48,00,000 | 100.00% |
| Cost of goods sold | (37,60,000) | 78.33% |
| Gross profit | 10,40,000 | 21.67% |
| Operating expenses | (5,70,000) | 11.88% |
| Net profit | 4,70,000 | 9.79% |
What each one tells you
Gross profit moves with buying and pricing: supplier rates, schemes and discounts, wastage, theft, and the mix of what sells. If the store's gross margin fell from 21.67% to 20%, gross profit would fall by about ₹80,000 on the same sales, even if nothing else changed.
Net profit moves with the cost of running the shop. If rent rose from ₹20,000 to ₹25,000 a month, that is ₹60,000 more a year: gross profit stays at ₹10,40,000, but net profit drops to ₹4,10,000.
Margin and markup are different
Margin is profit as a share of the selling price; markup is profit as a share of cost. An item bought at ₹80 and sold at ₹100 has a ₹20 profit: a 20% margin but a 25% markup. Confusing the two is a common reason shops under-price. Our margin vs markup guide has a table for quick conversion.
Common mistakes
- Looking only at the total sales figure
- Using purchases instead of cost of goods sold, so gross profit swings with stock levels
- Leaving out the owner's own salary-like drawings when judging whether the shop "pays"
- Comparing margins across very different products as if they were one
- Calculating margin on the price including GST
Watching both every month
Put the two percentages side by side each month. If gross margin is steady and net margin falls, look at expenses: a new salary, higher electricity, a rent increase. If gross margin falls, look at buying and pricing first. For Sri Lakshmi Stores, a net margin around 10% on ₹4 lakh of monthly sales means about ₹39,000 of profit a month, which also has to cover Ramesh's household drawings of ₹20,000.
Key terms on this page
- Sales: income from goods sold, before GST
- Cost of goods sold: opening stock + purchases − closing stock
- Operating expenses: the costs of running the shop, such as rent, salary, electricity and depreciation
- Margin: profit as a percentage of selling price
- Markup: profit as a percentage of cost
About the worked example
The examples on our accounting pages follow one shop through one year: Sri Lakshmi Stores, a kirana in Mysuru owned by Ramesh, for the financial year 2025-26. It sold ₹48 lakh of goods (before GST), made a gross profit of ₹10.4 lakh and a net profit of ₹4.7 lakh, and ended the year with a balance sheet total of ₹7.95 lakh. The figures are illustrative but they add up across every page, so you can follow one transaction from the journal to the balance sheet.
How TripleBill handles it
TripleBill's profit and loss shows gross and net profit for any period from the ledger (Starter and Pro). Bill-wise, party-wise and item P&L reports show margin per invoice, customer and product, using each item's current purchase price as cost.
General information on bookkeeping, not accounting or tax advice. For your final accounts and filings, consult a chartered accountant.
Last reviewed
Last reviewed: November 2026.
Frequently asked questions
What is the difference between gross profit and net profit?
Gross profit is sales minus the cost of goods sold; net profit is what remains after all other expenses as well.
What is a good gross margin for a kirana?
It varies by product mix and location. Track your own margin month by month and by category rather than chasing a number from elsewhere.
Can gross profit be positive and net profit negative?
Yes, when operating expenses exceed gross profit.
Is depreciation deducted before gross profit?
For a shop, no. Depreciation of shop fixtures is an operating expense, deducted to arrive at net profit.
Is net profit the same as cash in hand?
No. Profit includes credit sales not yet collected and excludes things like loan repayments and drawings.
Is income tax deducted in net profit?
A proprietor's P&L usually shows profit before tax, because the tax is on the owner personally. Companies show profit before and after tax.
What is operating profit?
Gross profit minus operating expenses, before interest and tax. For a small shop with no loans it is usually close to net profit.
Why did my net profit fall when sales rose?
Either the margin on the extra sales was thin, or expenses grew faster than gross profit. Compare gross margin % and expenses as a % of sales for both periods.
Should discounts given to customers reduce gross profit?
Yes. Discounts given on the bill reduce sales, so they reduce gross profit. Track them separately so you can see what they cost you.
Is gross profit the same as contribution?
Not quite. Contribution deducts all variable costs, such as card fees and packing, as well as the cost of goods; for a shop the two are close but contribution is a little lower.
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