Earnings are the profits of a company. Earnings per share (EPS) is the figure on which corporate taxes are based. Many other technical terms are also used such as EBIT and EBITDA for an overview of certain aspects of corporate accounting. Basically, earnings refers to the profits a company makes from its activities. In this article we will discuss how to properly calculate earnings.
The first step in accounting is to record all corporate revenue and expenses in terms of cash and assets, and then arrive at the gross revenue figure used to calculate the profit/loss of a company. The gross profit figure 1 is the total income obtained from all sources, which includes the sales of products/services/assets, the purchases of capital stock and payments of bank loans. The gross earnings figure 1 is calculated by adding the value of interests received on loans, equity securities, retained earnings, property and equipment, and other items that have a direct or indirect effect on a company’s profit.
Net income, or income from operations less any amount deducted for expenses, represents the second step in accounting. Net income represents all cash flow from operations less any amount used for capital gains, capital repayments, and other payments. All expenses, net of receipts, are deducted before the final net income figure is produced. The difference between the gross income figure and the net income figure is the excess or loss. Any income or surplus over and above the initial balance that can be further used to reduce the loss or surplus is referred to as surplus income.