No other business term is so misunderstood, misstated, misleading or deceiving as the words ‘net profit’. Accounting defines net profit as the amount earned after all associated costs and expenses are subtracted from the associated sales. The larger or more public the company the more reliable the dollar value as stated on the bottom line. But in small business, the more likely the value is inaccurate as stated in the financial report.
To understand and appreciate this term, the reader must first grasp the technical definition. Next, the term is used in different contexts including taxable net profit, financial net profit, accrual or cash basis and is sometimes stated with market basis in mind. Therefore, the reader must understand that the term net profit must be interpreted from the perspective of the particular basis of accounting. Finally, there are outside factors that can greatly impact its meaning and therefore its application in business. This article is designed to introduce the reader to these various definitions of net profit so that in reading or in conversation