What is the difference between revenues and earnings?

Income is the money earned by a person or organization after all expenses are deducted. It comes from various sources, including the sale of goods, services provided, or capital investments. Income, Revenue, And Earnings are three items that can be found in a company’s financial statements.

Earnings are the residual amount left after revenues have been reduced by all expenses, such as the cost of goods sold and operating expenses. If the volume of expenses exceeds revenues, then there will be no earnings at all – just losses. Earnings give the reader a good idea of how efficiently management is operating the business, as well as how well its products are positioned to appeal to customers. The total earnings figure in each reporting period is stated near the bottom of the income statement. The gross profit margin, operating profit margin, and net profit margin are three key profit measures. Analysts use these data to analyze a company’s income statement and operating activities.

Revenue is what is earned from the sale of goods and services related to the company’s operations. Generally speaking, when margins are improving, the company is making more money. Companies can grow their net income and EPS by cutting costs, even if revenues are flat or decreasing. But there are actually several different types of income in business accounting.

The higher the earnings that are left after all deductions have been made, the more money left over for other items or projects. For an individual, “revenue” is the gross amount of money that is generated, pre-taxes, taken out of your check. Businesses that have high earnings totals are seen as positive investments as they are making much more money than it takes for them to 5 things only tiny house living can teach you pay all expenses and employees on their payroll. Similarly, for a business, revenues may be high; however, if deductions such as payroll, taxes, and bills are high, then your ending dollar amount is low. Oftentimes, for tax filing purposes, the IRS requires your gross annual income for your household. This is without subtracting the federal or state taxes you pay per check.

Revenue vs Income

On the other hand, the fact that a company beats its earnings estimates is an indicator of its solid performance. In some cases, the reliability of revenue can be questionable as the metric is prone to potential manipulation. For example, the management of a company can artificially inflate revenues by applying aggressive revenue recognition principles.

• A company may decide it is more beneficial to return capital to shareholders in the form of dividends.
• It is a critical measure of financial performance that reveals how well a company can generate money from its primary business operations.
• Both revenue and retained earnings can be important in evaluating a company’s financial management.

Retained earnings is a figure used to analyze a company’s longer-term finances. It can help determine if a company has enough money to pay its obligations and continue growing. Retained earnings can also indicate something about the maturity of a company—if the company has been in operation long enough, it may not need to hold on to these earnings. In this case, dividends can be paid out to stockholders, or extra cash might be put to use. Conversely, revenue sits at the top of the income statement and shouldn’t be confused with earnings or net income.

Revenue vs. Earnings: What’s the Difference?

While revenue represents the total income generated, earnings indicate the profits made after accounting for expenses. Earnings are considered to be the amount of money generated in an allotted time period by an individual or a business. Earnings totals reflect the amount of income when all deductions have been paid out. Revenues are considered to be the amount of money that is generated in an allotted time period also by a person or business. However, revenues are the total amount of money taken in without subtracting any deductions. For an individual, “earnings” are the amount of money a paycheck provides after subtracting what bills and expenses need to be paid for the month.

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Revenue is incredibly important, especially for growth companies try to establish themselves in a market. However, retained earnings may be even more important for companies who have been saving capital to deploy for capital expansion or heavy investment into the business. Net sales are calculated as gross revenues net of discounts, returns, and allowances. Though gross revenue is helpful in accounting for, it may be misleading as it does not fully encapsulate the activity regarding sale activity. For example, a company may post record-level sales; however, a major recall that resulted in 10% of all sales being returned will have material consequences on net revenue.

Both revenue and earnings are indispensable when assessing a company’s fiscal wellbeing. Apple Inc. (AAPL) posted a net sales number of $229 billion for the period. The company’s revenue number represented a 6.7% top-line growth rate from the same period a year earlier. Earnings and net income can include income that’s not a direct result of the sale of goods and services, which can include proceeds from the sale of an asset or division, and interest gains on investments.

Alternatives to Revenues and Earnings

In contrast, stagnant or diminishing earnings might flag challenges in maintaining market competitiveness. Below is the income statement for Apple Inc. as of the end of their fiscal year in 2017 from their 10K statement. Earnings and income are often used interchangeably and are thus considered synonymous with each other—and many times, they are. However, there are various types or classifications of earnings and income that each have slightly different meanings. Income can be used to analyze and determine whether a company is operating efficiently. For example, if the company’s actual earnings are lower than the estimated earnings, it may indicate poor performance of the company.

Retained Earnings

Operating expenses include selling, general, and administrative expenses (SG&A), depreciation, and amortization. Operating income does not include money earned from investments in other companies or nonoperating income, taxes, and interest expenses. Also excluded are any special or nonrecurring items, such as acquisition expenses, proceeds from the sale of a property, or cash paid for a lawsuit settlement. In addition to considering revenue, it is impacted by the company’s cost of goods sold, operating expenses, taxes, interest, depreciation, and other costs. It may also be directly reduced by capital awarded to shareholders through dividends. Therefore, while the scope of revenue is more narrow, the impact to retained earnings is much more far-reaching.

How to Calculate Operating Income

As an example, consider a hypothetical business — a grocery store with $100,000 in sales per year. Simon Property Group (SPG) and Brookfield Asset Management (BAM) rescued JCPenney out of bankruptcy in the fall of 2020. As of late 2022, it had about 670 stores while reporting low debt levels largely as a result of the restructuring. Technically, net sales refer to revenue minus any returns of purchased merchandise. Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.