Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Accounting Earnings

What it is:

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 it works (Example):

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 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

In general, negative or low earnings might suggest a myriad of problems, ranging from 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 it Matters:

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.