What is net profit?

By Book Keeping Pros
Sources checked 15 Oct 2026

Definition

Net profit is the amount a business has left after all of its business expenses, including the cost of goods sold and overheads such as rent, wages, insurance and interest, are taken away from its income for a period. It is also called the bottom line, because it sits at the foot of a profit and loss statement.

Net profit builds on gross profit. Once the direct cost of sales is gone, every other running cost comes off too, from advertising and software subscriptions to bank fees. When those costs add up to more than the gross profit, the result is a net loss instead.

Because net profit is earned over a period, it does not tell you how much cash is in the bank. Sales customers have not yet paid for can count in net profit before the cash arrives, while stock bought ahead of need and the principal part of a loan repayment can take cash out without reducing net profit by the same amount.

Net profit is only as reliable as the period's cut-off. A monthly or quarterly profit and loss statement takes each account's activity for that period's own dates. Depending on how the books are kept, a bill covering the whole year, such as insurance, may be spread across the months it covers instead of landing in the month it was paid. Costs that use up an asset gradually, such as depreciation of equipment, also reduce net profit without any cash leaving that month.

In Australia

business.gov.au defines net profit as your total gross profit minus all business expenses, also known as your bottom line. Its glossary defines profit more broadly as the total revenue a business earns minus its total expenses.

Its guide to reviewing your financial health suggests a check at least once a year, including the profit and loss statement, which it says shows financial performance and profitability over time. Among the trends to look out for, it lists falling sales, low profit margins and more spending than you budgeted for.

To put results in context, the guide points to benchmarking, measuring your performance against similar businesses, and notes that the ATO publishes small business benchmarks showing whether a business sits within the range for its industry. The business.gov.au glossary describes the break-even point as the point at which income and expenses are equal, which is a net profit of nil.

Worked example

Illustrative example: from gross profit to net profit for one month
Item	Amount (AUD)
Gross profit	18,400.00
Rent	3,200.00
Wages	7,900.00
Insurance	450.00
Advertising	1,150.00
Bank fees and interest	310.00
Total expenses	13,010.00
Net profit	5,390.00

Illustrative example only: these rows show the method and are not sourced data.

Common mistakes

Reading net profit as the amount of cash the business has available to spend.
Recording drawings, personal expenses paid from the business account, as business expenses.
Leaving out bills received but not yet paid at the end of the period when the books are kept on an accrual basis.
Judging one month's net profit on its own instead of comparing it with the same month last year and with the budget.

Common questions

Is net profit an asset?

No. Net profit is a result, not something the business owns. It is worked out on the profit and loss statement for a period, while the assets it helped produce, such as cash in the bank or money customers owe, are recorded on the balance sheet in their own right. At the end of the financial year, income and expense accounts restart from nil and the year's net profit moves into equity, adding to the owners' interest in the business.

What is the difference between net profit and net profit margin?

Net profit is an amount; net profit margin expresses it as a share of sales, found by dividing net profit by sales for the same period. Because it allows for the size of the business's sales, the margin makes a quiet month and a busy month easier to compare. A falling margin is a signal to look into costs or prices rather than proof of a problem, and it is most useful set against your own earlier results and businesses like yours.

Why is net profit important to a business?

Net profit shows whether the business covers all of its costs from what it earns, not just the cost of what it sells. Profit kept in the business adds to equity over time, and net profit is one of the figures lenders and prospective buyers may look at when judging performance. A run of net losses steadily shrinks the owners' interest, even while the bank balance still looks comfortable.

Is net profit worked out after all expenses?

Yes. Net profit is what remains once every business expense for the period has been taken from income, including cost of goods sold, overheads, interest and depreciation. Some money leaving the business is not an expense and stays out of the calculation, such as drawings by sole traders and partners, the price of equipment recorded as an asset, and repayments of the amount borrowed on a loan. Classing those payments correctly matters as much as the arithmetic.

Related terms

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Sources

Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
Review your financial health
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.