How do I calculate net profit?

Calculate the total revenues for your business. These can include proceeds from direct sales, licensing or royalty income, or any other transaction that results in a material or financial benefit.

If your business uses cash-basis accounting, recognise these revenues in the accounting period when the payment is received. This is the simplest accounting method, and commonly used by smaller and less complex businesses.

If your business uses accrual-basis accounting, recognise these revenues in the accounting period they are earned, even if payment is not collected.

Total Expenses

Total expenses are the costs associated with running your business. These include those directly related to your product, as well as overhead and regulatory expenses. Common examples are:

Cost of goods sold is the amount paid to produce your goods or service. These can include payments to suppliers, manufacturing expenses or expenses related to offering material for sale such as sales commissions.

Wage and labour expense is the amount paid to employees, contractors or consultants. Include any payroll-related expenses such as employee benefits.

The operating and other expenses category includes all amounts not directly related to sales of a product. These might include utilities, rent, office expenses, research costs or insurance.

Interest paid to any lender or creditor.

Taxes paid to any government entity. Any tax refunds should be deducted from this expense.

Calculate Net Profit

Subtract all the expenses listed in Section 2 from your total revenue. The result is the net profit.

Use caution, as different items may or may not be deductible based on your business type. Always consult a registered tax professional.

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About the Author

Andrew Hazleton has been writing on a freelance basis for more than 20 years, and his work has appeared in national, regional and in-house publications. His work has appeared in "Sports Illustrated," "IEEE Spectrum," "Popular Photography" and several newspapers. Hazleton has a Bachelor of Science in engineering from Lehigh University and a master's degree in management from Pepperdine University.

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