The Concept of Earnings

Earnings are basically the net profits of a company’s operation. Earnings per share (EPS) is the measure of earnings earned by a company. Many other terms are also used as EBITDA and EBIT. The companies’ financial statements are prepared based on the current value of their stock, less purchases of inventory, less disbursements made for property and equipment and estimated future cash inflows. All of these numbers have to be prepared before a company can make an accurate projection of its earnings for the next fiscal year.

The concept of Earnings and how it is calculated can be understood from looking at the two most widely used methods of calculating earnings, namely gross profit and net profit. The first method of calculation uses gross profit and the second uses net profit. Usually both are used together, but sometimes one is presented on the balance sheet whereas the other is not. When the calculation of net profit is made then only the gross profit is used. Therefore, the earnings that actually occur is less than the net profit.

Earnings reflects all the income-producing activities of a business. They include sales price, selling prices, salaries paid to employees, interest received, bonuses and rent or mortgage, net gain from disposal of assets and surplus cash flow. A profit and loss account records all the income-producing activities of the business on a daily basis and creates the basis on which the income statement is prepared. The accounting policies of an enterprise determine the method of recording the results of operations for the financial year in a profit and loss account, including the recognition of revenue earned and expenses incurred. Generally the more current the accounts, the easier it will be to calculate the net earnings.