Net Profit: Definition & Calculation

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  • 0:05 What Is Net Profit?
  • 2:37 Net Profit Calculation
  • 4:43 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

In this lesson, you will learn about net profit. You will learn the definition of net profit, how it is calculated, and see an example of how it relates to everyday life.

What Is Net Profit?

Net profit, often referred to as net income, is the amount of money a company has left after all expenses, including taxes, have been subtracted from total revenue. Net profit is reported on a company's income statement and is one of the key indicators of the success or failure of a company's business operation during a given time period. The actual formula for calculating net profit is:

Net Profit = Total Revenue - Total Expenses

To illustrate the concept of net profit, let's look at Jessie's story.

Jessie was one proud young man. At just age 12, he had managed to find a way to make money over the summer. He was going to mow lawns and had seven yards to do each week. The way Jessie figured it, 7 yards a week at $20 a yard would give him $140 a week of spending money. If he saved it all, then he could have over $1,600 by the end of the summer. He was going to be rich! At the end of the first week, Jessie proudly counted out his earnings to his dad, James.

'Look at this, Dad' Jessie said, 'cold, hard cash!'

'I see,' James said to Jessie, 'You did great.'

'Yep, Dad, the way that I have it all figured, by the end of the summer, I could have over $1600 saved up to spend just how I want.'

James couldn't help but chuckle. 'You're right, Jessie. By the end of the summer, you would have made over $1,600, but that's not how much you will have to save.'

'Why not?' Jessie asked.

'Because, Jessie, you have to think about how much it costs you to make that money. You can only count on saving your net profit, not everything that you get paid for mowing the grass.'

A confused look came over Jessie's face. He didn't quite understand this net profit thing.'

Let me explain a little better, Jessie,' said James. 'You see, in the business world, finances are a little more complicated. The amount of money that you make for selling a product or a service is called revenue. So, when you get paid to mow someone's grass, you are getting revenue. However, to make money also costs money. Think about it. Who pays for the gas in the lawn mower?'

'I do,' Jessie said.

'That's right. And who will pay for sharpening the blades on the lawn mower?' James asked.

'I guess that's me too, huh?' Jessie said.

'Yep, it is. In business, in order to find out how much money you really made, you have to do a little calculation. The bottom-line dollar amount that you can say you made and have to spend is called net profit. Net profit is the amount of money that you have left after subtracting all your expenses.'

Net Profit Calculation

'Okay,' Jessie said. 'Then let's figure out my net profit.'

'Get a pencil and paper, Jessie, and I will show you how to do the math.'

Jessie quickly ran and grabbed a notebook and pencil. He was eager to see how much money he really made this week. After all, he sure worked hard!

'Okay, Dad. I'm ready.'

'Let's get this figured out then. How many times did you have to fill up the gas can this week?' James asked.

'Three times,' Jessie replied.

'And how much gas did you put in each time that you filled it up?' James asked.

'Five dollars,' Jessie responded.

'So, add up the total amount of money you spent this week to mow grass,' James said.

'I spent $15 on gas this week to mow grass,' Jessie answered.

'Okay. On the left side of your paper, write down the word expenses. Under that put $15,' James instructed.

Jessie did as he was told and wrote down his expenses for the week.

'On the right side of your paper, write the word revenue. What is revenue, Jessie?' James asked.

'It is how much money I got paid this week, right?'

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