Calculation of Net Profit

Definition and Procedure to Explain Net Profit:

We have already learnt in the accounting for inventories chapter that how profits and losses may be determined on account of trading operations. The next part of income statement, also referred to as profit and loss section, gives a list of expenses to be deducted from gross profit and of incomes to be added to gross profit.

At its simplest, the trading section of income statement determines the raw (gross) profit on direct trading, whereas the income statement shows what and how much expenses are then paid out of that profit. The net result is known as net profit.

Income statement like any other account is a part of double entry system as all revenue incomes and expenses are transferred to the income statement with the help of proper bookkeeping entries.

Recall that capital is affected by changes in revenue and expenses items. At the end of the account period an income statement is prepared to determine the net effect on profits of the specific changes in incomes and expenses.