Earnings and profit are related, but not exactly the same. They are different in the terms of how they are calculated. Earnings and profit calculations are used to identify the financial health of a business. They are typically used in reporting business income to tax authorities. New business owners usually make mistakes, they want to see the large number of sales on financial statements, if the number of sales is high they think they are operating good, but they should actually look at how much they are profiting.
Most studied number in a company's financial statement are earnings because of the profitability of the company that they show. A business earns the income called earnings, and can be calculated after subtracting the costs …show more content…
It represents the amount of disposable income that a consumer or firm has to spend on future investments or on present consumption.
Profit is a benefit that is realized when the amount of revenue gained from a business activity goes beyond the expenses, costs and taxes needed to keep the activity. Any profit gained goes to the owners, and they can decide where to spend it. A company may have large amount of earnings but have very little profit. It is calculated: Profit = Total Revenue – Total Expenses
Profit before tax (PBT) is a profitability measure that shows company's profits before the company pays corporate income tax. It deducts all expenses from revenue including operating expenses and interest expenses, leaving the payment of tax. PBT gives investment analysts helpful information for evaluating a company’s operating performance without tax. It exists because tax expense is continually changing and taking it out helps investor giving him a good idea of changes in a company's profits or earnings from year to year.
For example, the income statement of company XYZ looks like:
Sales revenue $ …show more content…
Accruals represent incomplete transactions. These accounts include: accounts payable, accounts receivable, goodwill, future tax liability and future interest expense.
Accrued revenue: recognized before cash is received
Accrued expense: recognized before cash is paid out
An example of accrual for revenue can be electric utility company. The utility used coal and many employees in January to generate electricity that customers received in January. The utility doesn't bill the electric customers for the January electricity until the meters are read in
February. There must be an adjusting entry to increase revenues that were earned in January and the receivables that the utility has a right to as in January 31.
Example for accrual expense is an employee's bonus which is earned in 2010, but will not be paid until 2011. The 2010 financial statements need to reflect the bonus expense and the bonus liability. Prior to issuing the 2010 financial statements an adjusting entry is used to record
Most studied number in a company's financial statement are earnings because of the profitability of the company that they show. A business earns the income called earnings, and can be calculated after subtracting the costs …show more content…
It represents the amount of disposable income that a consumer or firm has to spend on future investments or on present consumption.
Profit is a benefit that is realized when the amount of revenue gained from a business activity goes beyond the expenses, costs and taxes needed to keep the activity. Any profit gained goes to the owners, and they can decide where to spend it. A company may have large amount of earnings but have very little profit. It is calculated: Profit = Total Revenue – Total Expenses
Profit before tax (PBT) is a profitability measure that shows company's profits before the company pays corporate income tax. It deducts all expenses from revenue including operating expenses and interest expenses, leaving the payment of tax. PBT gives investment analysts helpful information for evaluating a company’s operating performance without tax. It exists because tax expense is continually changing and taking it out helps investor giving him a good idea of changes in a company's profits or earnings from year to year.
For example, the income statement of company XYZ looks like:
Sales revenue $ …show more content…
Accruals represent incomplete transactions. These accounts include: accounts payable, accounts receivable, goodwill, future tax liability and future interest expense.
Accrued revenue: recognized before cash is received
Accrued expense: recognized before cash is paid out
An example of accrual for revenue can be electric utility company. The utility used coal and many employees in January to generate electricity that customers received in January. The utility doesn't bill the electric customers for the January electricity until the meters are read in
February. There must be an adjusting entry to increase revenues that were earned in January and the receivables that the utility has a right to as in January 31.
Example for accrual expense is an employee's bonus which is earned in 2010, but will not be paid until 2011. The 2010 financial statements need to reflect the bonus expense and the bonus liability. Prior to issuing the 2010 financial statements an adjusting entry is used to record