Q.Distinguish between gross profit and net profit.

Net (pure) Profit is the genuine reward for the entrepreneur's function of bearing risk and uncertainty. It is obtained by deducting from Gross Profit all the implicit (imputed) payments for the entrepreneur's own factors — rent for his own land/building, wages for his own labour and management, interest on his own capital — as well as depreciation and insurable risk premiums. What is left is the net profit, the reward for uninsurable risk and uncertainty-bearing.

Gross Profit and Net Profit

Gross Profit is the total surplus left with the entrepreneur after meeting all explicit (paid-out) expenses. But gross profit includes some payments that really belong to the entrepreneur's own factors of production.

Net Profit (Pure Profit) is the amount that remains after deducting from gross profit the following implicit costs:

1. Rent of the entrepreneur's own land or building.
2. Wages for the entrepreneur's own labour and management services.
3. Interest on the entrepreneur's own capital invested.
4. Depreciation and maintenance of capital assets.
5. Insurance premium for insurable risks. …

Net profit (pure profit) is what remains of gross profit after deducting the implicit payments for the entrepreneur's own factors (rent, wages, interest) and normal depreciation. It is the pure reward to the entrepreneur for bearing risk and uncertainty and for innovation.

Meaning

Gross profit is the total surplus a business is left with after meeting its explicit (paid-out) expenses. But a part of this gross profit is really the reward for the entrepreneur's own factors of production. When these are deducted, what is left is net profit.

Net profit (pure profit) is obtained by deducting from gross profit:

• implicit rent for the entrepreneur's own land or building,
• implicit wages for his own labour and management,
• implicit interest on his own capital, and
• normal depreciation and maintenance charges. …