What are Accounting Earnings?
Accounting earnings, or net income, represent the amount of money gained or lost after all costs, depreciation, interest , taxes and expenses have been deducted from a company's total sales.
How Do Accounting Earnings Work?
A simple formula for calculating accounting earnings is:
Accounting Earnings = Revenue - Cost of Goods Sold (COGS) - General & Administrative Expenses - Depreciation - Interest Expense + Internet Income - Taxes - Preferred Dividends
Let's assume that Company XYZ delivered the following financial results last year:
| Revenue | $1,000,000 |
| Cost of Goods Sold | $500,000 |
| General Expenses | $300,000 |
| Depreciation | $100,000 |
| Interest Expense | $5,000 |
| Interest Income | $1,000 |
| Taxes | $10,000 |
| Preferred Dividends | $10,000 |
Using the formula and the example information above, we can calculate Company XYZ's accounting earnings as follows:
$1,000,000 -$500,000-$300,000-$100,000-$5,000+$1,000-$10,000-$10,000 = $76,000
In general, negative or low earnings might suggest a myriad of problems, ranging from insufficient gross profit margins to inadequacies in customer or expense management to unfavorable accounting methods.
Changes in accounting methods can greatly influence accounting earnings, and in many cases these changes may have little to do with a company's actual operations. Some companies strive to minimize taxes and will therefore intentionally minimize their accounting earnings.
Why Do Accounting Earnings Matter?
Accounting earnings are some of the most closely followed numbers a company publishes. Care should be taken when comparing accounting earnings over time, as many companies and industries are cyclical and/or seasonal. As a result, comparisons are generally most meaningful between the same fiscal quarter in different years.
