Net profit is the final profit a business is left with once all costs are accounted for - cost of sales, operating expenses, interest and tax. Sitting at the foot of the income statement, it is commonly called the bottom line, net income or profit after tax.
What it means
Net profit takes operating profit, subtracts interest on borrowings and income tax, and arrives at the amount that truly belongs to the owners for the period. It is the figure that feeds into equity: net profit not paid out as dividends becomes retained earnings on the balance sheet.
Where it fits in
Every payroll cost - direct labour in cost of sales, overhead salaries in operating expenses, and all employer contributions - has already been deducted by the time net profit is struck. So net profit is what is left after the business has fully paid for its people.
Key rules
- Net profit is revenue less every expense, interest and tax.
- The bottom line of the income statement.
- Undistributed net profit flows into retained earnings.
- All payroll cost is deducted before net profit is reached.
