What are Accounting Earnings?

Earnings that are reported in a given year may differ for the same company if different accounting methods were used. Earnings are the revenues of the company minus the cost of good sold, expenses, and investment losses.

If that seems like something that’s pretty cut-and-dried, and will look the same no matter who is doing the accounting… well, that’s not entirely correct. Earnings can be made to look different if different non-GAAP or pro-forma methods are used. If non-recurring expenses are ignored or amortized in a pro-forma accounting method, then earnings will not match up to the GAAP-based books.

The SEC has many warnings in place about misleading investors with anything other than GAAP accounting, and any uses of pro-forma earnings should be accompanied by full disclosures. They are likely to only be used internally with their own employees and board, and with financial institutions such as banks who know enough about finances to understand the difference between GAAP and pro-forma earnings.

Profit is generally synonymous and used interchangeably with earnings, as is Net Income. All three are basically revenue minus cost of goods sold, minus business expenses and taxes. Earnings divided by the number of outstanding shares gives us the Earnings Per Share, which is an important number for investors because it gives them an idea of how much of the earnings they are buying for the price of a share.

Earnings can also be looked at in specific ways, such as Earnings Before Tax (EBT), and Earnings Before Interest Taxes Depreciation and Amortization (EBITDA).