What are Accounting Earnings?
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.
How Do Accounting Earnings Work?
A simple formula for calculating accounting earnings is:
Let's assume that Company XYZ delivered the following financial results last year:
|Cost of Goods Sold||$500,000|
Using the formula and the information above, we can calculate Company XYZ's Accounting earnings are as follows:
$1,000,000 -$500,000-$300,000-$100,000-$5,000+$1,000-$10,000-$10,000= $76,000
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.