Difference between Earnings and Revenue

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1. Revenue

Revenue is defined as the amount of money received by an organization within a particular time period factoring any deductions and discounts for all merchandise returned. It is the money brought in through the organization’s business activities. It is the figure of the gross income from which costs are deducted in order to arrive at the net income. It is usually calculated by multiplying the amounts or units sold by the price at which services or goods are sold. Revenue, also known as ‘top line’ is displayed at the top of a company’s income statement. In order to arrive at net income, expenses are deducted from revenue.

Depending on the accounting method that a business employs, there are several ways of revenue recognition. The accrual method of accounting treats revenue as all sales done on credit so long as the services or goods have already been delivered to the consumer. Thus, checking the cash flow statement is of paramount importance in order to assess the efficiency of how a company collects its owed money. On the other hand, cash accounting method accounts sales as revenue when the payment is received. Whenever a customer makes payment, this is referred to as a receipt so that it can be distinguished from revenue. In case a customer pays for services before being rendered or pays for goods before being delivered to him, then the company, this is a receipt with no revenue.

For American corporations, revenues are reported at the top line of the income statement while earnings on the other hand are reported near the bottom of the income statement. This amount is the ‘earnings’ before making deductions like cost of sales and expenses.

Government revenue refers to the financial services which are financed through participation of social products distribution which are financial resources that enable proper functioning of the government. These include taxation revenue from sources like value added tax, consumption tax, business tax, personal income tax and others.

2. Earnings

Earnings simply mean ‘profits.’ In business, it is known as the bottom line or net income. It is also known as net pay, net salary, net earnings or the take home payment. For a business, earnings are equated to an individual’s take home payment. This is the money that a company is left with after paying the costs of carrying out business such as raw materials, payroll, taxation and interest on loans. Arguably, earnings are the definitive measure of business growth. Analysts are usually interested with organizations whose earnings are growing since this is what they retain after payment of all the bills. This is the reason as to why investors wait eagerly for the quarterly reports to see ‘earnings results’.

Types of earnings

There are several types of earnings; EBT represents earnings before taxes, Earnings Before Interest and Taxes is EBIT, while EBDIT represents Earnings before depreciation, interest and taxes. Earnings after taxes is EAT. EBDITA are earnings before depreciation, interest, taxes and amortization. In summary, it is the income before deducting all these costs.

How to Measure and Calculate Earnings–(EPS)

Earnings can be measured in terms of earnings per share (EPS). It is that proportion of an organization’s profit attributable to every individual stock. EPS indicates the profitability of a company and is very important when evaluating a particular stock.

EPS=Net Income- Dividends

Outstanding shares

EPS is normally reported over a period of time and number of shares outstanding may fluctuate over that time.

Shortcomings of EPS

Although many investors consider EPS as the most important ratio in stock evaluation, there are some EPS aspects which may mislead when two different companies are being compared. One organization for example may use capital twice as much for generating a similar amount of profit compared to another. However, it could not be utilizing efficiently its capital as much as the other. These numbers are not reflected in EPS.

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