The net income vs net earnings subject matter has been quite confusing to many as they want to know the similarities and differences between the two terms. In order to solve this problem, we start by looking at the definitions of both terms, from there, we conclude whether they are different or not, and explain why.
What is net income?
Net income is the amount of revenue that is left after subtracting the cost of goods sold and every other expense such as selling, general, and administrative expenses, operating expenses, depreciation, interest, and taxes. We can simply say that it is the overall income that is left after subtracting all expenses from the gross profit. It is also referred to as net earnings.
A net income figure is a useful number for investors and analysts as they assess how much revenue exceeds an organization’s expenses. This figure is calculated as well as appears on a company’s profit and loss statement, it indicates a firm’s profitability.
Businesses use the net income to calculate financial ratios such as the earnings per share and business analysts often refer to it as the bottom line since it is the last line item of the income statement. In the United Kingdom, analysts know net income as profit that is attributable to shareholders, particularly in dividend-paying companies.
To calculate a company’s net income, begin with the total revenue (net sales particularly, in cases whereby there are sales discounts, sales returns, and allowances. From this figure, subtract all the expenses incurred by the business. If earnings before tax have been calculated, simply subtract the tax amount from it to determine the net profit.
The net income figure, like other accounting measures, is prone to manipulation through such activities as aggressive revenue recognition or the hiding of expenses. When making decisions with regard to investment, it is critical for investors to review the quality of the numbers that were used to arrive at the taxable income and net income (NI).
Read also: Is Net Profit the Same as Net Income?
What are net earnings?
A company’s net earnings are the amount of income that is left over for a company after subtracting all business expenses from its total revenue. It is also known as net income.
It is oftentimes called the bottom line since it appears at the bottom of the income statement. In addition to the cost of sales (or COGS), other expenses for the net earnings include operating expenses, income taxes, interest expenses incurred on loans and debt, depreciation of fixed assets, and selling, general, and administrative expenses (SG&A).
For the calculation of the net earnings, the total revenue includes the amount of money that a business earns from the sale of products in addition to income from other places such as investments.
Looking at the fact that earnings take into account all the expenses and revenue of a company, it is a metric that reflects the actual profitability of a company during a particular accounting period. Net earnings are typically listed on the last line of a company’s income statement, for this reason, it is informally called the bottom line.
The net earnings calculation is an important metric that is used for assessing the overall financial health of a business. Investors are interested in this figure in order to determine whether it is worth investing in a company. A company that has consistently high net earnings will give investors the assurance that they are likely to see a return rather than a loss.
Lenders such as banks and other financial institutions look at a company’s net earnings in order to assess whether to grant it a business loan or not. Banks are oftentimes, more willing to give loans to companies that have higher net earnings because such companies are more likely to pay the loan back. It is important for small businesses to carefully track their net earnings to have a better understanding of their net profit margin and to determine ways they can generate higher revenues.
There are businesses that are expected to operate at a loss, especially in their early years. Determining net profit simply implies that they can still have a precise idea of the exact amount of net loss they are expecting and how long they expect to sustain losses.
Read also: Income Statement Ratios Formulas and Examples
Net income vs net earnings differences
The term, net income, net profit, and net earnings are used interchangeably, meaning that they are synonyms. They all refer to the income of a company that is left after subtracting all business expenses from total revenue. Having said this, we can conclude on the fact that the terms, net earnings vs net income only differ in their names, that is how they are being called.
Net income and net earnings similarities
Having looked at the definitions of the two terms above, we saw that they both refer to the amount of income that is left after subtracting all expenses from the total revenue. It is also seen that both terms are usually referred to as the bottom line on the income statement. Both terms refer to a figure that assesses the overall financial health of a business and while investors are interested in this figure to know if the company is worth investing in, banks and other financial institutions are interested in this figure to determine whether a business is likely to pay off its debts or loans.
In the above explanations of the separate terms, we saw that net income is also referred to as net earnings and that “net earnings” is also referred to as net income or net profit.
Earnings refer to the company’s profits, meaning that they refer to the net income of a company. The term generally can also be referred to as a company’s pre-tax income. In this context, there are different variations of earnings measures such as earnings before taxes, earnings before interest and taxes, and earnings before interest, taxes, depreciation, and amortization. Looking at this, the terms (net income and net earnings) are referring to the same subject matter.
We also saw above that companies commonly report earnings per share which is calculated using the net income/net earnings figure. So earnings are considered to be one of the most critical factors that determine a company’s financial performance and for public companies, equity analysts usually make their estimates of a company’s earnings on a periodic basis which can be quarterly or annually. Public companies are concerned with the difference between the actual earnings and the estimates that analysts provide. For example, if the actual earnings of a company are lower than the estimated earnings, it may be an indication of poor performance while situations, whereby the company beats its earnings estimates, is an indication of its solid performance.
Although the act of manipulating a company’s earnings or profits is unethical and illegal, some companies still leverage the flaws in current accounting standards to hide some deficiencies in their operating performances.
Read also: Profit Margin Ratios: Formulas and Calculations
Is net earnings the same as net income?
Net earnings and net income are used interchangeably as they mean the same thing. They are used as synonyms for income depending on how they are called in the United Kingdom and the United States. This fact makes it evident that net earnings and net profit are used interchangeably for net income. The fact that the calculations carried out on the income statement are the same is proof that they are synonymous.
- What is a Free Enterprise Economy? Definition and Examples - January 20, 2023
- What is an Unregulated Market? Definition and Examples - January 16, 2023
- Disadvantages of free enterprise economy - January 16, 2023