For all for-profit organisations, they aim to earn profits from the business activities they have carried out. Profit is a financial gain an organisation earns, and it is the difference between the amount of money earned and the spending of a company. There are three types of profits, which are gross profit, net profit and operating profit. If you find differentiating them difficult when generating financial statements, do not hesitate to hire an accounting firm in Singapore.
In this article, we will focus on the relationship between the net profit and operating profit that a company has generated. Net profit is the sum of income remaining after the company has deducted all the expenses incurred, the interest expenses, as well as taxes. In simple words, this is the profit that the company has earned from various sources after the deduction of all expenses (Also see Understanding What Are Non-cash Expenses? ). As against, operating profit is the income remaining after deducting all the costs and expenses the company has paid to run its business operations.
Net profit can be positive or negative. People often use it as an indicator that reflects the company’s ability in earning profits from its sales. By looking at the net profit, we get to know the profitability of a business as well as the amount of profit the company has earned in an accounting period. To calculate the net profit, we should work out the difference between the sum of revenue (Also see Introduction to Deferred Revenue) earned and the sum of expenses incurred. We can also calculate this figure by deducting interest expenses and taxes from the operating profits.
Operating profit, on the other hand, is the profit that a business has generated from its operations and core business activities. It includes neither the profits the company has earned from any investments made nor the profits earned from interests on the cash deposited in the bank savings account. The calculation of operating profits involves the deduction of operating expenses from the company’s gross profits.
The main difference between the net profit and operating profit is that the former is the sum of income left after the company has paid for all the costs incurred, while the latter is the total income left after deducting operating profits from the gross profits. People often use the net profit to determine the sum of profits a company has made in an accounting (Also see An Overview of Accounting Procedures) period. If they want to know how the company manages its expenses and resources, studying the operating income will be more suitable.
Both net income and operating income will appear in the profit and loss statement of a company. The readers of the financial statement will be able to know the company’s profitability and the sum of profits earned by looking at these two amounts. Thus, both are handy tools, and they can provide a clear picture of the financial health of the business to the readers.