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Earnings and profits are different in how they are calculated. Earnings are what a business makes after subtracting costs, while profit is the cash a business holds after expenses. Confusing the two can lead to financial failure. Tax agencies use earnings to determine a company’s financial status.
Earnings and profits are related, but they’re not exactly the same. Earnings and profits differ in terms of how they are calculated. Usually, earnings are the earnings a business makes, which can be calculated after subtracting the costs of manufacturing, purchasing, or supplying the items or services it sells. Profit on the other hand is essentially the cash a business holds after taking care of all its business expenses. As such, a business can have an impressive amount of earnings but have very little profit.
It may be helpful to consider an example when trying to understand the difference between earnings and profits. A gift basket company, for example, may raise $5,000 United States Dollars (USD) for gift basket sales over the course of a week. If it costs $2,500 USD to prepare these baskets, the gift basket company’s earnings could be $2,500 USD. The company may have $1,000 USD in other expenses, however, that reduce the amount of money it will actually keep. If so, the company’s profits could be $1,500 USD instead of the $2,500 USD left over after subtracting the cost of creating the gift baskets.
Not understanding the difference between earnings and profits can have a devastating effect on a business. Often, new entrepreneurs start seeing large numbers of sales and get excited prematurely. They measure the strength and success of their business ventures by the number of sales they’ve made in a given period of time rather than how much they’re making.
To understand how the confusion between earnings and profits can impact a business, it may help to consider an example where a salesperson receives $1,000 USD in sales for a week and thinks his business is doing well. If he subtracted the direct cost of selling his assets, he could see that his earnings were actually $600 USD for that time period. When he continues to subtract all other related expenses, he may find that his profit is much lower than expected. In fact, an entrepreneur may even find that they have failed to break even. If a business owner starts spending money without considering his actual profits versus earnings, it could be the road to financial failure.
Earnings and earnings calculations are often used to determine a company’s financial status. They are also typically used for reporting business revenues to tax authorities. Often, tax agencies want to know how much a business has collected over a given period of time, the cost of the goods or services sold, and the amount of profit it made.
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