What Is Net Profit And How To Calculate It

A company may earn money from various different non-operating and operating sources. It may also pay for several different expenses which may be continuous or one-time. Therefore, Net profit or net loss is the difference between indirect expenses and indirect incomes of business.

The term “NET” means the amount of money remaining after all deductions from a company's earnings. In the accounting profession, net profit and net loss is defined as the remaining difference between indirect expenses and indirect revenues.

After all the relevant indirect items are recorded in the income statement in their debit and credit columns, the difference is calculated to determine the net profit or net loss. The net profit or net loss is transferred to the capital account of the company.

NET PROFIT
In the income statement of a company, the company is said to have earned a net profit if the credit side (the income side) is in excess of the debit side (the expense). The amount calculated is the balancing figure to be put on the debit side as a part of balancing the account. (See image below)

Debit Side (Indirect Expenses) < Credit Side (Indirect Incomes)

The balance of the Net Profit is transferred to the Capital Account and shown on the Liability side of a balance sheet. (See image below)



NET LOSS
Net profit is the opposite of net loss. In the income statement of business, if the debit side (the expense side) is greater than the credit side (the income side) then the company has earned a net loss. The amount calculated is the balancing figure to be put on the credit side as a part of balancing the account. (See image below)

Debit Side (Indirect Expenses) > Credit Side (Indirect Incomes)

The net loss will be transferred to the Capital Account and shown on the Liability side (debit side) of a balance sheet. (Shown in the image)