What is Earnings?
Earnings are basically the net profits of a company’s operation over a given period. Earnings also is the total amount on which corporate taxation is based. Many other terms are also used for an accounting of different aspects of organizational operations, as EBIT and EBITDA in particular. The term “EBIT” is not as commonly used as it should be. This article will explain what EBIT is and what it means to you as the business owner.
The basic definition of EBIT is “the difference between book, basic and net income (profit) from the operating activities of a company.” The essence of EBIT is to provide a simple comparison of income and profits versus the expenses incurred. Many businesses use an accounting method called relative valuation using the net income statement method. Relative valuation compares the earnings of the company to its expenses. For instance, if the company incurred a net loss of $100 million in the last year, then the company would be reported up to the full year of operations in the year end income statement.
An annual examination of the company’s financial records provides a reliable picture of the overall profitability and health of the company. The accountant will record the gross income statement, a statement of all significant events that occurred during the year and generally speaking, the balance sheet, which details a company’s accounts receivable and accounts payable. The gross profit statement gives the description of the gross income and also includes gross profit, gross margin, and profit allocation. The profit allocation is the method by which a company divides its profit into various parts. All of these components are essential for a successful enterprise.