Definition
Net profit is the bottom line of the income statement: revenue minus cost of sales minus operating expenses minus interest minus tax. It represents the residual profit available to shareholders after every expense and obligation has been recognised. Net profit (or net loss) for the period closes into retained earnings on the balance sheet at year end, completing the link between the income statement and the equity section.
What net profit means in practice
For a bookkeeper, net profit is the single number that summarises the period. It captures whether the business generated more value than it consumed once every cost (direct, operating, financing, and tax) has been recognised. A positive net profit increases the wealth of the shareholders; a net loss decreases it.
The cascade that produces net profit is structured to let the reader see margin at each stage. Revenue at the top. Cost of sales below produces gross profit. Operating expenses below produce operating profit. Interest expense (or income) below produces profit before tax. Tax expense produces net profit. Each sub-total tells a different story: gross profit measures production efficiency; operating profit measures core-business effectiveness; profit before tax measures overall financial performance excluding the tax bill; net profit measures what shareholders actually get.
A practical example: a UK consultancy for the year ended 31 March 2027. Revenue 380,000. Cost of sales (subcontractors) 95,000. Gross profit 285,000 (75% gross margin). Operating expenses 200,000. Operating profit 85,000 (22% operating margin). Interest expense 2,000. Profit before tax 83,000. Corporation tax at 25% = 20,750. Net profit 62,250 (16% net margin). The 62,250 increases retained earnings on the balance sheet from 60,000 (prior year close) to 122,250.
How net profit works by country
United Kingdom
Accounting net profit is the starting point for the UK corporation tax computation under Corporation Tax Act 2009. The reconciliation to taxable profit happens on the CT600 corporation tax return and on the working papers prepared by the accountant. The most common adjustments: tax-disallowable expenses (client entertainment, depreciation, certain provisions) are added back; capital allowances are deducted. The result is taxed at 25% (or 19% small profits rate up to 50,000, with marginal relief in the 50,000-250,000 band).
Australia
Accounting net profit is the starting point for the company tax return. The Schedule 7 reconciliation handles disallowable expenses (entertainment is largely non-deductible, depreciation per the books is replaced by tax depreciation calculated under Division 40, certain provisions are deductible only when paid). The result is taxable income, taxed at 30% (or 25% base rate entity rate for businesses below AUD 50 million turnover with passive income under 80% of total income).
Canada
Accounting net profit flows into the T2 Schedule 1 reconciliation. Tax-disallowable items (50% of meals and entertainment, depreciation per the books, certain accrual-only items) are added back; capital cost allowance is deducted. The result is net income for tax purposes, taxed at the federal 15% plus provincial rates (effective combined rates range from 23% in Alberta and Ontario to roughly 31% in PEI for the general rate; small business deduction reduces the rate to 9-12% on the first CAD 500,000 of active business income).
New Zealand
Accounting net profit is the starting point for the IR4 company return. Schedule adjustments add back non-deductible items (entertainment 50% allowable, depreciation per the books) and substitute tax depreciation rates from the IRD’s prescribed schedule. The result is taxable income, taxed at the company tax rate of 28%.
Singapore
Accounting net profit is the starting point for Form C or C-S. Disallowable expenses (motor vehicle expenses on private cars, entertainment of a non-business nature, depreciation per the books) are added back; allowable deductions and capital allowances (sections 19, 19A, 19A(2)) are claimed. Singapore corporate tax is 17% with the partial tax exemption scheme reducing the effective rate on the first SGD 200,000 of chargeable income.
Related terms
Net profit is the bottom line of the income statement:
- Gross profit is the middle line of the cascade (revenue minus cost of sales).
- Operating expenses sit below gross profit on the way to operating profit.
- The income statement is the statement that produces net profit.
- Profit and loss is the everyday synonym.
- Retained earnings is where net profit closes at year end.
- A dividend is paid out of retained earnings (sourced from accumulated net profit).
See also
For the income-statement cascade in full, see the income statement entry.
FAQ
See the answered questions above for gross vs net profit, where net profit flows, and the accounting-to-taxable reconciliation.