Gross profit will always be the sales revenue minus the direct cost of the product or service (usually cost of goods sold)
Net profit is gross profit minus all other expenses.
Gross profit is what you sold your goods or services for minus the direct cost of producing them. But there are other expenses too - administration, advertising, business rates on your premises, lighting, heating, telephone bills, stationery, postage etc. - take these off too and you have net profit.
The question is, what is a direct cost of production? Let's take Captain's example and tweak it a bit - I don't just buy cakes and sell them on, I actually MAKE cakes. What does it actually cost me to make cakes? The price of the ingredients, obviously. And the wages of the bakers who make the cakes, and electricity or gas to power the ovens.
Wages are always the tricky one - workers in a factory are clearly a direct cost because they're actually producing your products. If I work as an accountant for a firm of accountants, my wages are a direct cost because I'm actually providing the accountancy service. People doing the administration are clearly an indirect cost so their wages come off AFTER calculating gross profit. But it's not always that simple and here we can get into the realms of "creative accountancy".
Back to the baking example - you asked on Yahoo! UK so I'm assuming you know who Greggs are. They make and sell sandwiches, bread, cakes and all kinds of other baked products. One of their selling points is that it's all really fresh because they make it all in the shop, so you've got the same people both making the products and selling them. The staff come in early each day to get baking, make sandwiches and be ready with freshly made food to sell when the shop opens. So some of their wages is a direct cost and some isn't. If Greggs want to calculate their gross profit, they've got to split the wages bill for shop staff between what is a direct cost of the time they spend baking and the cost of the time they spend not baking but manning the checkout instead.
Now let's make it even more complicated. Another thing Greggs do early in the day is they can sell you breakfast of a hot bacon or sausage roll plus a cup of tea or coffee. And they make the tea or coffee while you wait so it's fresh and hot. Now what is the direct cost of your drink, taking into account the time the person spent making it as opposed to the time they spent serving you and taking your money?
All you can do then is just make a reasonable split between what is direct wages (that goes into the calculation of gross profit) and indirect wages (that goes into the calculation of net profit), and there's no way of making it exact.
But I hope you get the general idea.
If i buy a cake for $10 and sell it for $20 i made $20 GROSS PROFIT
However i also paid to have the cake delivered, so that comes out of the 20, i also paid for the cake so that too comes out of the 20
I also put an ad online to sell my cake - that too comes out of the 20
So im left with 4 dollars after all the things i spent are taken out of the 20 - that is my NET profit.
Now MR Tax man comes along and says "hey cake dude, whats the net profit?" I tell him 4 dollars, and he says prove it - so i show him all the reciepts and he says AH GOOD you owe me TAX on that 4 dollars.
So i end up with about 3 dollars actual profit. 4 dollars was net profit.
So hope that explains what net profit is - AND that they tax you on the net profit so its not actual profit, only after the IRS get their blood money do you actually have A profit lol.
