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Earnings Statement Part 1
The Earnings Statement is a financial report that shows business profitability over some time period.
When to Use Earnings Statements
The Earnings Statement is prepared for a time period - typically a month, quarter, or year. It shows the sales and expenses during that time and ultimately whether or not the company made money (profit) during that time.
- All financial transactions for a time period are accumulated and shown on the Earnings Statement.
- The revenue transactions are placed in one category.
- The expense or cost transactions are normally placed in multiple categories.
- One of those categories is normally Cost of Goods Sold or variable costs which is the direct cost of producing the product or delivering the service.
- One of the categories is operating expenses, sometimes called overhead expenses. This category is often further divided so as to separate out interest expenses and tax expenses.
- After the expenses have been subtracted from the revenue, the remainder is called Earnings, Net Income or Profit.
- The personal equivalent of the Earnings Statement is personal income tax return. Your income tax return is for a period of time (one year). On your income tax return you record your personal revenue (wages, interest, dividends) and your expenses (deductions). What is left is your income before taxes and you then pay tax on that amount. Anything that is left is your personal profitability.
Hints and Tips
- All transactions are recorded either using the cash basis or the accrual basis – never mix these on a statement.
- Many companies will break the operating expenses into further subcategories such as R&D, depreciation, sales, IT, or other categories that are of significant importance to their industry.
- This statement is sometimes called an Earnings Statement, a Net Income Statement, a Profit and Loss Statement, and a P&L Statement.
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