What Are Earnings and How Are They Determined?
Earnings are the financial gains of a company. Earnings per share (EPS) is the measure on which earnings is based. There are two other terms used in accounting namely EBIT and EBITDA for a detailed study of certain aspects of company operations. Both these terms are financial measurements of earnings by companies. They basically give a picture of what a particular company has made in a given year to date. One of the most fundamental aspects of any business is its ability to earn money which ultimately leads to profits for the company.
The basic concept of earning and profit for accounting is that the shareholders of the company have their earnings recognized by the shareholders as they receive dividends or in case of a sale of shares. The earnings are reported on the balance sheet of the company and are recorded on a profit and loss account. The company then reports its earnings, gains and losses on its income statement. In order to obtain an accurate picture of the company’s performance, the balance sheet must be prepared in line with certain principles. The balance sheet should record all the financial transactions of the company such as revenue, expenses, gain/loss, net income, debt and equity, among others.
A company earns and losses depending upon the performance of its equity and capital stock. Earnings per share (EPS) is the most widely used term in accounting because it provides investors a reliable picture of what a company earns and how it earns it. The price of a share of stock may vary from the company shares actual trading price over time. However the EPS is derived from the net income earned by the company during a particular quarter of the year. The EPS figure is then compared to the net income of the company to get a company’s gross profit. In order to get the real picture of a company’s performance, investors need to monitor and track its gross profit along with its net profit.