The profit and loss account is an account in a company’s accounting books which credits a company’s incomes and gains and debits the company’s expenses and losses. The result is shown as the net profit or net loss over the given period of time, which is most commonly a financial year.

The profit and loss account shows the revenue which a company made in a given period and deducts the expenses and costs which are charged against the company’s revenues. The result will indicate the company’s net income or net profit or in the case of a loss the net loss.

The net profit or net loss is used in the company’s balance sheet.

The gross profit margin shows the percentage of sales which is going towards the gross profit of the business. This means it shows businesses the percentage of money left after the direct costs of goods sold are subtracted from the gross sales figures.

The gross profit ratio is calculated by taking the gross profit of a business and dividing it with the sales of the business. This number has to be multiplied by 100% to create the gross profit margin.

The calculation: Gross profit margin = Gross profit / Sales x 100%

For example if the gross profit margin is 70%, then 70 pence of every pound of sales is going towards the gross profit of the business and 30 pence is going towards the direct costs of goods sold.

The net profit margin is lower than the gross profit margin as more costs (indirect and direct costs) are included in this margin.

The net profit margin is calculated in a similar way to the gross profit margin.

The Calculation: Net profit margin = Net profit / Sales x 100%

If the net profit margin is 30%, then 30 pence of every pound of sales is going towards the net profit of the business and 70 pence is going towards the direct and indirect costs of the business.