Investopedia

Reviewed by Melody Bell
Fact checked by Vikki Velasquez

For most of us, obtaining a mortgage is a crucial step in purchasing a first home. Various financing options are available to first-time homebuyers—including conventional mortgages and government-backed loans from the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Understanding how they work can point you in the right direction, help you find the best lender for you, and save you a significant amount of time and money. Here is what you need to know.

Key Takeaways

• When you apply for a mortgage, lenders will evaluate your creditworthiness and ability to repay based on your income, assets, debts, and credit history.
• Among the decisions you’ll have to make are between a fixed vs. adjustable interest rate, the length of the loan term, and how large a down payment you can afford.
• You may be eligible for a Federal Housing Administration (FHA) loan, a U.S. Department of Veterans Affairs (VA) loan, or another type of government-guaranteed loan.
• As a first-time homebuyer, you may also be eligible for special programs that allow you to access deeply discounted homes and put low or no money down.

First-Time Homebuyer Requirements

To be approved for a mortgage, you’ll need to meet several requirements, which can vary depending on the type of loan you’re applying for and your particular lender. Mortgage lenders will generally require proof of income sufficient to make the monthly mortgage payments, enough cash for a down payment, and a credit score over a certain threshold.

To be approved specifically as a first-time homebuyer for some types of loans, you’ll need to satisfy the definition of a first-time homebuyer, which is broader than you may think. You don’t have to be a homebuyer in your 20s to be considered a first-time buyer.

According to the U.S. Department of Housing and Urban Development, a first-time homebuyer is someone who meets one of the following criteria:

• Has not owned a principal residence for three years
• Is a single parent who has only owned with a former spouse while married
• Is a displaced homemaker and has only owned with a spouse
• Has only owned a residence not permanently affixed to a foundation
• Is an individual who has only owned a property that was not in compliance with building codes

Common Types of Mortgages

Conventional Loans

Conventional loans are mortgages not insured or guaranteed by the federal government. They can be more challenging to qualify for than government-backed loans, requiring a larger down payment, higher credit score, and lower debt-to-income (DTI) ratio. However, if you can qualify for a conventional mortgage, it will usually cost less than a government-backed one.

Conventional loans are defined as either conforming or nonconforming. Conforming loans comply with guidelines established by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. They often buy loans from lenders, then package and sell them as securities on the secondary market.

The maximum conforming loan limit for a conventional mortgage in 2025 is $806,500, though it can be more in designated high-cost areas. A loan made above this amount is called a jumbo loan, which usually carries a slightly higher interest rate. These loans entail more risk (since they involve more money), making them less attractive to the secondary market.

For nonconforming loans, the lending institution underwriting the loan, usually a portfolio lender, sets its own guidelines. Due to regulations, nonconforming loans cannot be sold on the secondary market.

Federal Housing Administration (FHA) Loans

The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD), provides various mortgage loan programs for Americans. An FHA loan has lower down payment requirements and is easier to qualify for than a conventional loan. The FHA does not make the loans itself but guarantees loans made by approved private lenders, which lessens the lender’s risk.

FHA loans can be a good choice for first-time homebuyers because, in addition to their less stringent credit requirements, you can make a down payment as low as 3.5% in some cases or 10% in others. FHA loans are also subject to limits. In 2025, for example, the limit on a single-family home loan ranges from $524,225 to $1,209,750 depending on housing prices in the area.

U.S. Department of Veterans Affairs (VA) Loans

The U.S. Department of Veterans Affairs (VA) guarantees VA loans. As with FHA loans, the VA does not make loans itself but guarantees mortgages made by qualified lenders. These guarantees allow veterans and service members to obtain home loans with favorable terms and usually without a down payment.

In most cases, VA loans are easier to qualify for than conventional loans. Lenders generally limit the maximum VA loan to conventional mortgage loan limits. Before applying for a loan, you’ll need to obtain a certificate of eligibility from the VA.

In addition to these federal loan types and programs, some state and local governments and their agencies sponsor assistance programs intended to increase homeownership in certain areas.

If you’re a veteran, service member, or an eligible surviving spouse, you may qualify for a VA mortgage loan, which is partially guaranteed by the U.S. Department of Veterans Affairs. As a result, you can often get a home loan without a down payment or private mortgage insurance (PMI).

How Lenders Decide What to Charge You

Lenders look at a number of factors in deciding how much money they might be willing to lend you and on what terms. Your creditworthiness plays a major role, so you can expect that they will review your credit reports and check your credit score.

They will also calculate a loan-to-value (LTV) ratio, comparing the amount you want to borrow against the value of the home. LTV is determined by dividing the loan amount by the purchase price of the home. Lenders assume that the more money you are putting up in the form of a down payment, the less likely you’ll be to default on the loan. The higher the LTV, the greater the risk of default, so lenders will charge more.

For this reason, you should include any type of qualifying income that you can when applying. Sometimes, an extra part-time job or income-generating side business can make the difference between qualifying or not qualifying for a loan, or in receiving the best possible rate. A mortgage calculator can show you the impact of different rates on your monthly payment.

Private Mortgage Insurance (PMI)

If you aren’t planning to make a down payment of 20% or more on a conventional mortgage, the lender is likely to require that you purchase private mortgage insurance (PMI). PMI helps insulate the lender from the possibility of you defaulting on the debt by transferring a portion of the loan risk to a mortgage insurer. The cost of PMI will vary based on the loan amount and the type of mortgage.

Once your equity in the home reaches the 78% level, the lender or loan servicer is supposed to stop charging you for PMI. If that doesn’t happen automatically, you can request that they drop it.

As a general rule, try to avoid PMI if you can because it is a cost that has no benefit to you.

Fixed-Rate Mortgages vs. Variable-Rate Mortgages

Another consideration is whether you want a fixed-rate or adjustable-rate (also called a variable-rate or floating-rate) mortgage. In a fixed-rate mortgage, the rate does not change for the entire length of the loan. The obvious benefit of a fixed-rate loan is its predictability. And, if prevailing interest rates are low when it’s issued, you can lock in a good rate for a substantial period of time.

An adjustable-rate mortgage (ARM), while less predictable, often comes with a low introductory rate that can mean more affordable payments during the early years of the loan. That may also allow you to qualify for a larger loan than you could get with a fixed rate.

Of course, this option can be risky if the rate shoots up after the introductory period ends and your income is no longer adequate to handle the monthly payments. However, these loans typically have caps on how far and how fast your rates can rise.

The most common types of ARMs today are for five-, seven-, or 10-year periods, after which they adjust. At that point, the interest rate will reset periodically, often every month. When an ARM resets, its new rate will be determined by the index to which it is tied (such as the rates on Treasury securities) plus an additional margin tacked on by the lender.

Warning

Mortgage lending discrimination is illegal. If you think that you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with either the Consumer Financial Protection Bureau (CFPB) or HUD.

Specialty Programs for First-Time Homebuyers

In addition to the traditional funding sources available to anyone, there are some specialty programs for first-time homebuyers. Among them:

Fannie Mae’s Ready Buyer Program

The Federal National Mortgage Association’s (Fannie Mae’s) HomePath Ready Buyer program is designed for first-time buyers. It provides up to 3% assistance toward closing costs on the purchase of a foreclosed property owned by Fannie Mae. To be eligible for the program, applicants must complete a mandatory home-buying education course before making an offer.

Individual Retirement Account (IRA) Withdrawals

Eligible first-time homebuyers can take up to $10,000 out of an individual retirement account (IRA) without paying the usual 10% penalty for early withdrawals. Since the limit is per individual, a couple could withdraw up to $10,000 each from their own IRAs for a total of $20,000.

Note that this exemption only applies to the penalty for early withdrawals. If you withdraw money from a traditional IRA, you will still have to pay income taxes on it.

If an eligible first-time homebuyer has a Roth IRA, they can withdraw money for the purchase both tax- and penalty-free as long as they’ve had a Roth account for at least five years. They can also withdraw their contributions to the Roth account (but not the earnings) whenever they wish.

State Down Payment Assistance Programs

Many states have down payment assistance programs for first-time buyers. Eligibility varies from state to state, but generally, these programs are geared toward lower-income individuals and public servants. HUD maintains a list of programs for each state on its website.

What Credit Score Is Needed to Buy a House?

Most conventional mortgages require a credit score of 620 or higher; however, Federal Housing Administration (FHA) loans can accept a credit score as low as 500 with a 10% down payment or as low as 580 with a 3.5% down payment.

What Is the Average Interest Rate for a First-Time Homebuyer?

Interest rates depend on various factors, including credit scores, down payment amount, type of loan, and market conditions. There is no data to indicate that first-time homebuyers pay higher or lower interest rates than experienced homebuyers with similar financial qualifications.

Are There Any State Tax Credits for First-Time Homebuyers?

While the first-time homebuyer tax credit was eliminated at the federal level in 2010, several states still offer their own tax credits. Additionally, some municipalities and counties offer property tax reductions for first-time homebuyers in their first year. You can check the websites of your state and local tax departments to see what you may be eligible for.

How Do Rent-to-Own Agreements Work With Homes?

In rent-to-own agreements, a person can rent a home for a period of time, with the option to buy it before the agreement expires. In some cases, a portion of their rent will be applied to the down payment.

What Happens if Your Mortgage Application Is Denied?

If a lender turns down your mortgage application, it is required by law to tell you why. The reason may be something you can address before applying again, such as improving your credit score or lowering your debt-to-income ratio. And just because one lender denies your application, that doesn’t mean another lender won’t approve you.

The Bottom Line

First-time homebuyers have several financing options, including some that aren’t available to other people. A good mortgage broker or mortgage banker may be of help here, but nothing will serve you better than knowing your priorities and the trade-offs you’ll need to weigh in finding the best mortgage lender for you.

Reviewed by Charles Potters
Fact checked by Suzanne Kvilhaug

Loss Ratio vs. Combined Ratio: An Overview

The loss ratio and combined ratio are used to measure the profitability of an insurance company. The loss ratio measures the total incurred losses in relation to the total collected insurance premiums, while the combined ratio measures the incurred losses and expenses in relation to the total collected premiums.

Key Takeaways

• The loss ratio and combined ratio are used to measure the profitability of an insurance company.
• The loss ratio measures the total incurred losses in relation to the total collected insurance premiums.
• The combined ratio measures the incurred losses as well as expenses in relation to the total collected premiums.

Loss Ratio

The loss ratio is calculated by dividing the total incurred losses by the total collected insurance premiums. The lower the ratio, the more profitable the insurance company, and vice versa. If the loss ratio is above 1, or 100%, the insurance company is unprofitable and maybe in poor financial health because it is paying out more in claims than it is receiving in premiums. For example, say the incurred losses, or paid-out claims, of insurance company ABC are $5 million and the collected premiums are $3 million. The loss ratio is 1.67, or 167%; therefore, the company is in poor financial health and unprofitable because it is paying more in claims than it receives in revenues.

Enterprises that have a commercial property and liability policies are expected to maintain loss ratios above a certain level. Otherwise, they may face premium increases and cancellations from their insurer. For example, take a small dealer of used commercial equipment, who pays $20,000 in annual premiums to ensure their inventory. A hailstorm causes $25,000 in damages, for which the business owner submits a claim. The insured’s one-year loss ratio becomes $25,000 / $20,000, or 125%.

In order to ascertain what kind of premium increase is warranted, carriers may review claims history and loss ratios for the past five years. If the insured has a very brief tenure with the insurer, the company may decide that the commercial equipment dealer presents an unacceptable future risk. At that juncture, the carrier may choose not to renew the policy.

Combined Ratio

A combined ratio measures the money flowing out of an insurance company in the form of dividends, expenses, and losses. Losses indicate the insurer’s discipline in underwriting policies.

The combined ratio is usually expressed as a percentage. A ratio below 100% indicates that the company is making underwriting profit, while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums. Even if the combined ratio is above 100%, a company can potentially still be profitable because the ratio does not include investment income.

Important

The combined ratio is calculated by summing the incurred losses and expenses and dividing the sum by the total earned premiums.

For example, suppose insurance company XYZ pays out $7 million in claims, has $5 million in expenses, and its total revenue from collected premiums is $60 million. The combined ratio of company XYZ is 0.20, or 20%. Therefore, the company is considered profitable and in good financial health.

Key Differences Between Loss Ratio and Combined Ratio

Some of the more notable differences between the two ratios are:

• Scope of Measurement – The loss ratio focuses solely on incurred claims compared to earned premiums, while the combined ratio provides a broader picture by incorporating both claims and operating expenses.
• Expense Consideration – The loss ratio ignores administrative and operational costs, while the combined ratio includes these expenses. This means an insurer could have a low loss ratio but still be unprofitable if operating costs are too high. The combined ratio accounts for this by factoring in underwriting and administrative expenses.
• Profitability Insight – The loss ratio alone cannot determine profitability since it only considers claims payouts. The combined ratio provides a clearer view of overall profitability.
• Use by Stakeholders – Insurance companies use the loss ratio primarily to assess their underwriting risk. Generally speaking, investors and regulators favor the combined ratio as it includes the full cost of running the business.
• Impact of Market Conditions – Loss ratios generally tend to fluctuate more with claim trends, such as natural disasters or economic downturns that increase insurance payouts.

Note

All else being equal, health and auto insurance tend to have higher loss ratios due to frequent claims, while property and specialty insurance often have lower loss ratios but higher expense ratios.

Using Loss Ratio and Combined Ratio Together

Neither the loss ratio nor the combined ratio alone can provide a complete picture of an insurer’s financial health—each serves a distinct purpose. In practice, when used together, they typically provide a more holistic view.

By using both ratios together, insurers can pinpoint the root cause of financial performance issues. For example, if a company has a high combined ratio but a healthy loss ratio, the problem likely lies in operational inefficiencies rather than claim payouts. Otherwise, if the loss ratio is too high, it signals that the insurer may need to adjust pricing, tighten underwriting standards, or reassess risk exposure. Investors and regulators also benefit from this dual analysis, as it helps them differentiate between insurers that are unprofitable due to excessive claims and those suffering from poor cost management.

In general, neither ratio should be viewed in total isolation. The loss ratio is useful for evaluating underwriting risk, while the combined ratio provides a more complete measure of profitability. Together, they allow for a more accurate evaluation.

Example of Loss Ratio and Combined Ratio

Imagine an insurance company that specializes in homeowners’ insurance. For several years, it has maintained a loss ratio of 60%, meaning it pays out $0.60 in claims for every $1.00 in earned premiums. This is considered a strong underwriting performance. Due to aggressive expansion efforts, its expense ratio has climbed to 50%. This results in a combined ratio of 110%.

Now, suppose the situation changes the following year. The company successfully reduces its operating expenses, lowering its expense ratio to 25%. However, during that same period, a series of hurricanes and wildfires significantly increase the number of claims. This pushes the loss ratio up to 85%, which is much higher than the previous year. Despite the company improving its cost efficiency, the sharp rise in claims still results in a combined ratio of 110%. Now, instead of struggling due to high operating costs, the company is unprofitable because of underwriting losses.

This example shows how both ratios must be monitored together. In the first case, expenses were the issue, while in the second case, high claim payouts were the problem. Even though the company faced the same 110% combined ratio in both scenarios, the underlying causes were completely different.

What Is the Loss Ratio in Insurance?

The loss ratio is used in the insurance industry to measure the relationship between incurred claims and earned premiums. It is calculated by dividing total claims paid (including adjustments) by total earned premiums.

What Is the Combined Ratio in Insurance?

The combined ratio expands on the loss ratio by also incorporating operating expenses. It is calculated by adding the loss ratio and the expense ratio, which includes costs such as underwriting, administrative, and marketing expenses.

What Does a Combined Ratio Above 100% Mean?

A combined ratio below 100% indicates that an insurance company is making an underwriting profit, while a ratio above 100% means the company is losing money on its core insurance operations.

What Is the Key Difference Between the Loss Ratio and the Combined Ratio?

The primary difference between the two ratios is scope. The loss ratio focuses solely on claims expenses relative to earned premiums, providing insight into underwriting risk. The combined ratio, however, includes both claims and operating expenses, offering a broader picture of an insurer’s overall efficiency and profitability.

The Bottom Line

The loss ratio and combined ratio are insurance metrics that measure profitability, but they focus on different aspects. The loss ratio tracks claims paid relative to premiums, while the combined ratio includes both claims and operating expenses. While the loss ratio helps assess underwriting performance, the combined ratio provides a more complete picture of an insurer’s financial health.

Reviewed by Chip Stapleton
Fact checked by Vikki Velasquez

The capital-to-risk weighted assets ratio, also known as the capital adequacy ratio, is one of the most important financial ratios used by investors and analysts. The ratio measures a bank’s financial stability by measuring its available capital as a percentage of its risk-weighted credit exposure. The purpose of the ratio is to help banks protect their depositors and promote financial health.

The capital-to-risk-weighted assets ratio for a bank is usually expressed as a percentage. The current minimum requirement of the capital-to-risk weighted assets ratio, under Basel III, is 10.5%, including the conservation buffer. Having a global standard promotes the stability and efficiency of worldwide financial systems and banks.

Key Takeaways

• The capital-to-risk-weighted assets ratio is used to represent the financial solvency of a bank.
• The ratio is calculated by dividing a bank’s total capital by it’s risk-weighted assets.
• Under the Basel III accord, the minimum requirement of capital-to-risk weighted assets is 10.5%.

Formula for the Capital-To-Risk Weighted Assets Ratio

The formula to calculate a bank’s capital-to-risk weighted assets ratio is:

$textbf{Capital-To-Risk Weighted Assets=}frac{textbf{Tier 1 Capital+Tier 2 Capital}}{textbf{Risk-Weighted Assets}}$Capital-To-Risk Weighted Assets=Risk-Weighted AssetsTier 1 Capital+Tier 2 Capital​

Tier 1 capital is the core capital of a bank; the capital it needs to absorb losses without stopping operations. It includes equity and disclosed reserves. Tier 2 capital is supplementary capital that is less secure than tier 1 capital. It includes undisclosed reserves and subordinated debt. A bank’s risk-weighted assets are its assets weighted by their riskiness used to determine the minimum amount of capital that must be held to reduce its risk of insolvency. These items can all be found on a bank’s financial statements.

10.5%

The minimum capital-to-risk weighted assets ratio, under the Basel III accord. This was originally 8%, but a conservation buffer of 2.5% was added in 2019.

Example of the Capital-To-Risk Weighted Assets Ratio

Assume bank ABC has tier 1 one capital of $10 million and tier 2 capital of $5 million. It has $400 million in risk-weighted assets. The resulting capital to risk-weighted assets ratio is 3.75%:

$text{Capital-to-risk weighted assets} = frac{$10 text{MM} + $5 text{MM}} {$400 text{MM}} times 100$Capital-to-risk weighted assets=$400MM$10MM+$5MM​×100%

With a ratio significantly below 10.5%, bank ABC has not met the minimum requirement of capital-to-risk weighted assets. The bank is holding too much in risk-weighted assets, in comparison with its tier 1 and tier 2 capital.

On the other hand, assume bank DEF has tier 1 capital of $15 million, tier 2 capital of $10 million, and $75 million in risk-weighted assets. Bank DEF’s resulting capital-to-risk weighted assets ratio is 33%:

$text{Capital-to-risk weighted assets} = frac{$15 text{MM} + $10 text{MM}} {$75 text{MM}} times 100$Capital-to-risk weighted assets=$75MM$15MM+$10MM​×100%

Therefore, bank DEF is financially stable, likely to be able to absorb its losses.

What Are Risk-Weighted Assets?

A bank’s risk-weighted assets represents the value of the bank’s portfolio of loan assets, weighted with a multiplier representing the risk of each loan. For example, loans that are secured by collateral have a lower risk value than unsecured loans, and borrowers with a high credit rating have a lower risk value than those with a lower rating. Cash is considered the least risky asset. Taken together, the bank’s risk-weighted assets is used to calculate the bank’s ability to pay its obligations if it is placed under financial stress.

What Is the Tier 1 Capital Ratio?

Tier 1 capital represents a bank’s core capital—the value of all common shares issued by the bank, as well as its retained earnings and disclosed reserves. In the event of a financial crisis, this capital will be used to repay the bank’s obligations before any depositors are affected.

What’s the Difference Between Capital Adequacy and the Solvency Ratio?

The capital adequacy ratio (CAR) and solvency ratio are both metrics used to measure a company’s ability to withstand financial losses. The main difference is that capital adequacy measures a bank’s capital in comparison with its loan obligations, whereas solvency measures a company’s ability to pay its financial obligations with cash on hand. The solvency ratio can be applied to all companies, but capital adequacy is used exclusively for banks and other financial institutions.

The Bottom Line

The capital-to-risk weighted assets ratio will help determine whether or not a bank has enough capital to take on any losses before becoming insolvent and losing depositor funds. It’s important for a bank to monitor this ratio and adhere to regulatory requirements to avoid going insolvent and to protect its clients and the larger economy as a whole.

Reviewed by Charlene Rhinehart
Fact checked by Vikki Velasquez

Generally speaking, the Internal Revenue Service (IRS) allows companies to deduct the cost of goods that are used to either make or purchase the products they sell for their business.

For accounting and tax purposes, these are listed under the entry line-item cost of goods sold (COGS). This reduction can be a major benefit to companies in the manufacturing or mining sectors that have lengthy production processes and COGS figures that are high. However, not all businesses can claim a COGS deduction, because not all businesses can list COGS on their income statement.

Key Takeaways

• Companies in the mining and manufacturing sector benefit from being able to deduct the cost of goods sold (COGS) from their income. 
• Costs of goods sold include the direct cost of producing a good or the wholesale price of goods resold.
• Not all companies can list COGS on their income statement, however.
• In particular, many service-based businesses, such as accounting and real estate firms, do not have COGS. That’s because they don’t make or carry a good/inventory. 

Exclusions From Cost of Goods Sold (COGS) Deduction

Many service companies do not have any cost of goods sold at all. COGS is not addressed in any detail in generally accepted accounting principles (GAAP), but COGS is defined as only the cost of inventory items sold during a given period. Not only do service companies have no goods to sell, but purely service companies also do not have inventories. If COGS is not listed on the income statement, no deduction can be applied for those costs.

Examples of pure service companies include accounting firms, law offices, real estate appraisers, business consultants, professional dancers, etc. Even though all of these industries have business expenses and normally spend money to provide their services, they do not list COGS. Instead, they have what is called “cost of services,” which does not count towards a COGS deduction.

Note

Purely services businesses—such as accountants and lawyers—cannot claim the COGS deduction, because they do not sell merchandise.

Cost of Revenue vs. COGS

There are also costs of revenue for ongoing contract services that can even include raw materials, direct labor, shipping costs, and commissions paid to sales employees. Even these cannot be claimed as COGS without a physically produced product to sell, however. The IRS website even lists some examples of “personal service businesses” that do not calculate COGS on their income statements. These include doctors, lawyers, carpenters, and painters.

Many service-based companies have some products to sell. For example, airlines and hotels are primarily providers of services such as transport and lodging, respectively, yet they both sell gifts, food, beverages, and other items. These items are definitely considered goods, and these companies certainly have inventories of such goods. Both of these industries can list COGS on their income statements and claim them for tax purposes.

COGS and Other Deductions

Costs of goods sold include the direct cost of producing a good or the wholesale price of goods resold. Other potentially deductible costs include labor, assuming the labor was directly involved in the good’s production process, supplies, shipping costs, freight in, and directly related overhead.

There are also some indirect costs that can be included in COGS. Indirect costs can include rent, taxes, storage, handling, repacking, and certain administrative costs.

Companies that can claim COGS do so on their Schedule C via line 42. This is only possible if the company accurately values its inventory at the beginning and end of each tax year. If an expense is included in COGS it can’t be counted again as a business expense.

What Is Cost of Goods Sold in Simple Terms?

Put simply, the cost of goods sold (COGS) is the cost to a company of producing merchandise, regardless of the actual sale price. It includes the cost of raw materials and other supplies used to produce items for sale, as well as the costs of labor, shipping, and manufacturing. However, it does not include the operating costs and day-to-day expenses of keeping a business running.

What Is Not Included in Cost of Goods Sold?

The cost of goods sold (COGS) includes only the expenses that are directly related to producing and assembling a good to be sold. It does not include operating expenses such as a business’ office and administrative budget, legal and accounting services, distribution costs, or the money spent advertising the product.

How Do You Calculate Cost of Goods Sold?

A business’ cost of goods sold is calculated by the following formula:

COGS = Beginning inventory + Purchases – Ending Inventory

Where the beginning and ending inventories are based on the value of goods at the start and end of an accounting period.

The Bottom Line

Businesses can deduct part of the costs of goods sold (COGS) on their annual tax filing to reduce their obligations. However, it doesn’t cover all of their business costs. Only expenses directly associated with manufacturing or purchasing products for sale can be included.

Fact checked by Vikki Velasquez
Reviewed by Andrew Schmidt

Women who have gaps in their resume—for child rearing, for example—may find it hard to land a job when they’re over the age of 50. But there are certain careers that are more taylor-made for this demographic. If you are re-entering the work force or just want to try something new at midlife, several fields are wide open. The top 10 careers for women over 50 include real estate agent, financial advisor, nurse, occupational therapist, personal trainer, curriculum developer, tutor, freelance writer, personal chef, and counselor.

Key Takeaways

• Getting hired as an older person can be difficult, but specific careers lend themselves well to this demographic.
• Some of the best jobs for women over age 50 are in real estate, education, and the financial sector.
• Healthcare jobs with so-called soft skills are in-demand careers for 50-year-olds.
• The nursing profession is one of the fastest-growing career paths.
• Most careers call for higher education or certification.

Employment for Women By the Numbers

Employment for women is strong, according to data from the Bureau of Labor Statistics (BLS) analyzed by the Center for American Progress: More than one in 10 workers in the U.S. are women age 55 and older. Their percentage of the labor force grew steadily from 6.9% to 10.6% between April 2003 and April 2023. In that same time span, the labor force participation rate of women age 55 to 64 rose to 59.6%, up from 56.6%. Unemployment remains low in this age sector as well, all good signs for women in the workplace.

1. Real Estate Agent

The median age of a real estate agent is 55, and 65% of people pursuing real estate as a full- or part-time career are women. Real estate licenses are relatively inexpensive to acquire, as budget-friendly real estate courses can be completed online, and licensing exam fees typically cost about $650.

New licensees have a wide range of brokerage firms to choose from, depending on their work styles. Salaries vary since real estate agents earn more in high-population areas and those who deal exclusively with high-net-worth clients and luxury properties earn more.

2. Financial Advisor

Americans of all ages want to know how best to grow their wealth over the long term, and that is where financial advisors fill a need. Women interested in this fast-growing career must have degrees in finance and significant finance experience, which comes with age.

Sales and customer service experience also helps financial advisors gain and retain clients. Most financial advisors work in the finance and insurance industry or are self-employed. This latter option is a significant benefit for women who wish to work from a home office and have flexible hours.

3. Nurse

The nursing profession continues to grow at a pace much faster than all other professions, making this female-dominated career a viable and potentially lucrative option for women over age 50.

Prospective nurses of all ages can earn their registered nurse (RN) licenses through a local community college or hospital-run program and be on the job earning competitive wages in approximately two to three years. The profession also offers women numerous opportunities for promotions and salary increases when they earn advanced certifications and degrees, such as a bachelor or master of science in nursing or a doctor of nursing practice.

Note

From 2023 to 2033, employment of nurse practitioners is expected to grow by 46.3%, according to the BLS.

4. Occupational Therapist

The occupational therapy field is another female-dominated health profession, experiencing lightning-fast growth as baby boomers and disabled persons living longer, healthier lives are in need of therapy to improve their quality of life.

Occupational therapists must have a master’s degree in the field, but women over age 50 interested in entering the even-faster-growing field of occupational therapy assistance can become job ready in two years with an associate’s degree in occupational therapy from an accredited community college.

5. Personal Trainer

The diversity of people seeking fitness training, including baby boomers, makes it possible for women over age 50 to pursue careers as personal trainers. Older women with backgrounds in sports and fitness can get jobs quickly with a personal trainer’s certificate.

Still, some people also pursue fitness training credentials to get fit and make a living sharing their journey to fitness with others. Personal trainers can be entrepreneurs and work with their clients or corporations, such as fitness centers, health care institutions, and wellness companies.

6. Curriculum Developer

Women with significant experience in education or corporate training can pursue careers as curriculum developers. The proliferation of online learning makes it possible for curriculum developers to work for corporations as employees or pursue their careers as freelancers. Curriculum developers typically have master’s degrees and gain clients and jobs on the strength of their portfolios.

7. Freelance Writer

Freelance writers can choose their clients and work as much or as little as they wish to control their earnings. Freelance writers have a selection of specialization options, such as writing search engine optimized content, marketing collateral, newspaper and magazine articles, and educational materials. Women over age 50 who enjoy writing can take advantage of the numerous perks of being a freelance writer, including earning income while traveling.

8. Tutor

Former licensed teachers and college professors have the best chance of success as tutors. Some tutors make money by signing up with online tutoring services and helping students online. Others work with private clients one-on-one in their homes.

Tutors with extensive knowledge of in-demand subjects, such as mathematics, the sciences, and foreign languages, as well as standardized test preparation expertise, have the best chances of earning competitive wages.

9. Counselor

The need for counselors and therapists increases as more public and community institutions offer these services to community members. Women over age 50 interested in careers as counselors or therapists should earn master’s degrees in their area of specialization, such as substance abuse, marriage and family, and children. They also need to pass a licensing exam to have a career in this profession.

10. Personal Chef

A personal chef is a financially lucrative career for women over age 50 that marries top-notch cooking skills and house calls. Personal chefs can market their services and gain clients to serve regularly. Some personal chefs have grown their careers by writing and marketing cookbooks, teaching cooking classes, and catering.

What Are the Best Jobs for Women Over 50?

There are many lucrative jobs for women over 50 years of age. Real estate, nursing, and finance are all sectors that offer well-paying jobs for women in this age group.

Is It Difficult for Older Women to Find Jobs?

It can be difficult for anyone to find a job, but older women should be able to find work in their desired fields if they have the necessary education and experience. It is against the law for potential employers to discriminate against any individual based on their age.

How Can I Find a Job at 50?

When you are job hunting at any age, but especially midlife, connections and networking can help you find out about good jobs. Use your alumni network, friends, and family members, and reach out to former colleagues if you have been out of the workforce. Online job listing sites, LinkedIn, and even social media sites list work opportunities. If you can afford it, consider volunteering or even interning at a workplace in a field of interest and build on that experience to find a paying job.

The Bottom Line

Changing careers or starting over in the workplace in your fifties can be a daunting proposition, but there are many opportunities available. Taking time to review job requirements such as certification, licensing, or further education can help you decide the direction you want to go in, as will matching your experience and talents to the job pool. Many people work into their 70s and even 80s by choice; if you start at age 50, you could have at least 20 more years ahead of you in a field you enjoy.

Reviewed by Amy Drury
Fact checked by Suzanne Kvilhaug

Accrual Accounting Methodology

Accrual accounting is the preferred approach for companies reporting their financial statements under generally accepted accounting practices (GAAP), which are issued through the standards of the Financial Accounting Standards Board (FASB).

Accrual accounting requires companies to record sales at the time in which they occur. Unlike the cash basis method, the timing of actual payments is not important. If a company sells an item to a customer through a credit account, where payment is delayed for a short term (less than a year) or long term (more than a year), the accrual method records the revenue at the point of sale.

This can be important for showing investors the sales revenue the company is generating, the sales trends of the company, and the pro-forma estimates for sales expectations. In contrast, if cash accounting was used, a transaction would not be recorded for a while after the item leaves inventory. Investors would then be left in the dark as to the actual sales performance and total inventory on hand.

Key Takeaways

• There are two accounting methods practiced by companies: the accrual accounting method and the cash accounting method.
• Only the accrual accounting method is allowed by generally accepted accounting principles (GAAP).
• Accrual accounting recognizes costs and expenses when they occur rather than when actual cash is exchanged.
• The matching principle of accrual accounting requires that companies match expenses with revenue recognition, recording both at the same time.
• Only public companies are required to use the accrual accounting method.

GAAP

GAAP includes certain revenue recognition standards that companies must follow. GAAP includes certain revenue recognition standards that companies must follow to ensure that revenue is recognized when a sale has been transacted, regardless of when the customer pays. If goods are transferred to the customer, or services are provided, then revenue is recognized. If the customer has not paid, then a corresponding accounts receivable is booked, which is eliminated once the company receives cash.

However, companies still have a great deal of flexibility to enact accounts receivable procedures with varying time frames.

Accrual accounting is another term for the matching principle. This requires that companies match revenues with the expenses incurred to generate them.

Important

Accrual accounting highlights the fact that some cash payments for goods or services may never be received from a consumer.

Depreciation and GAAP

A key example of the matching principle is depreciation. Let’s say that a company pays for items of property, plant, and equipment in cash, it will record a reduction in cash and an increase in long-term assets, and no expense is recorded.

Depreciation allows a company to recognize that this purchase is an expense; the asset will wear up over its useful life and will need to be replaced. Since the asset will be generating additional revenue during its useful life, the company should take the cost of the asset and spread this over the useful life to match the revenue it has generated.

GAAP is required for public company accounts that are filed with the Securities and Exchange Commission (SEC). Non-listed companies may choose to follow GAAP if they require financing or if their accounts are scrutinized by a third party, for example, they are required to be audited. In any case, it is commonplace to use accrual accounting. Smaller enterprises may choose to use cash accounting as their accounts are not used externally or by third parties.

What Are the Advantages of the Accrual Method?

The accrual method provides an accurate, real-time view of a company’s finances and cash flow, allowing it to plan for the future and manage its debts and obligations. In the United States, all public companies must use the accrual method of accounting.

What Are the Advantages of Cash Basis Accounting?

Cash basis accounting is generally simpler than the accrual method, making it more suitable for small businesses. Cash basis accounting recognizes revenue only when cash is received, and it only recognizes expenses when cash is paid. In other words, it does not consider a company’s accounts payable and accounts receivable.

When Can I Use Cash Basis Accounting?

In the United States, you can use the cash basis method of accounting if your business makes less than $25 million per year in sales, and does not sell merchandise directly to customers.

The Bottom Line

Companies can use the accrual accounting method or the cash method when preparing their financial statements; however, if a company is public, it must use the accrual accounting method as specified by GAAP. A company might also use the modified cash-basis accounting for its internal records.

GAAP prefers the accrual accounting method because it records sales at the time they occur, which provides a clearer insight into a company’s performance and actual sales trends as opposed to just when payment is received.

Reviewed by Anthony Battle
Fact checked by Suzanne Kvilhaug

Investing in a 401(k) plan may frustrate those who like to pick stocks. The available offerings through an employer can be limited and 401(k) accounts restrict most owners from withdrawals before age 59½ without penalty.

Choosing stocks and controlling their portfolio allows individuals to avoid 401(k) restrictions but they miss out on tax benefits. According to a study by the Plan Sponsor Council of America, 98% of companies with a 401(k) plan offer matching contributions.

Key Takeaways

• A 401(k) contribution is based on pre-tax income, lowering an individual’s immediate tax bill.
• Taxes are deferred on a traditional 401(k) until retirement.
• Choosing individual stocks requires constant monitoring and early sell-offs may incur capital gains taxes.

The 401(k) Plan

Money invested in a traditional 401(k) is subtracted from pre-tax earnings. Delaying taxes until distribution keeps more money invested in an account during an individual’s working years, which means greater earnings over time. A Roth 401(k) allows individuals to pay income taxes on their contributions up front, and then withdraw the money tax-free in retirement.

Employers commonly match a portion of an employee’s savings in a 401(k). For example, an employer may contribute $1 for every $1 an employee contributes up to 3% of their salary. However, investors can’t touch 401(k) money until they reach age 59½ without paying the income tax due plus a 10% tax penalty. There are certain exceptions, such as disability.

Investment options can be limited to the choices an employer offers. These generally include a range of mutual funds, from conservative to aggressive funds. Individuals cannot predict their retirement tax rate, making it difficult to estimate how much money they’ll have in their funds as they retire.

Important

Employers may offer a target-date fund, an investment fund based on an investor’s retirement year, and rebalanced periodically to optimize returns over the long term as an individual reaches retirement age.

Stock-Picking

Individuals who invest on their own for retirement do not face penalties or have to meet any requirements for withdrawal. They also enjoy the freedom to invest in any financial vehicle. However, they forego the deferred tax advantages of a 401(k) plan combined with an employer match.

“If you invest your retirement directly into stocks instead of a retirement account, you will be subject to taxes on the dividends and capital gains when you sell the stocks. You also have the variability of stock price performance that may require you to sell at an inopportune time. While you may want to buy and hold, the economic outlook may change, requiring you to sell and realize capital gains,” explains Kirk Chisholm, a wealth manager at Innovative Advisory Group in Lexington, Mass.

There’s also the matter of an individual’s skill as an investor. Making significant money over time stock-picking is risky and time-consuming to outperform the overall market. Many investors use index funds to simplify the process.

$66,000

The amount a 401(k) balance would exceed an individual stock-picker’s balance, assuming a $2,000-a-year investment in each with 3% employer matching and a 7% a year growth rate over 35 years.

What Funds Are Available to 401(k) Investors?

Mutual funds are an investment option in 401(k) plans, though some companies may offer exchange-traded funds (ETFs). Both mutual funds and ETFs contain a basket of securities. Mutual funds range from conservative to aggressive in risk tolerance.

What Happens To a 401(k) When an Employee Resigns?

Those who resign may be able to keep the 401(k) with the financial servicer but cannot make any further contributions. Individuals can rollover their old 401(k) to a new one with a new employer or into an Individual Retirement Account (IRA).

What Is a Vesting Period?

A vesting period is a designated time that an employee must be on the job to enjoy benefits, including the 401(k) match. An employer can take back the funds they contributed to an employee’s 401(k) if they do not remain employed until the end of their vesting period. For example, an employer’s 401(k) match vesting schedule may last three years. Those who leave the company after working two and a half years will not receive any of the 401(k) matching contributions made by the company since you were hired.

The Bottom Line

A 401(k) is an easier choice for individuals who do not have the skill or time to choose investments and monitor their portfolio’s performance. Investors must weigh the pros and cons of employer matching, tax benefits, and their risk tolerance to decide where to save their retirement money.

Reviewed by Charles Potters
Fact checked by Suzanne Kvilhaug

Free market capitalism is an economic system that can generate great wealth and prosperity for businesses, nations, and their citizens.

It is also a system that creates winners and losers through competition. While competition can lead to innovation and invention, it can also deteriorate the market share of existing companies. In the worst case, it can lead to bankruptcy.

Market share is a company’s percentage of an industry’s total sales. It is crucial to the financial success of a company.

It’s been widely recognized since the 1970s that companies with greater market share are usually more profitable than those in the same industry with smaller market share.

There are three key strategies that companies often use to regain lost market share:

• Pricing changes
• Promotional changes
• Product changes

All have benefits but can be risky. Read on for details about each strategy.

Key Takeaways

• Market share is the percentage of total industry sales generated by a single company.
• Companies with greater market share are usually more profitable than those in the same industry with smaller market share.
• Companies compete with one another for market share.
• If market share is lost to a competitor, there are several strategies that companies often use to fight back: lower prices, greater marketing efforts, and innovation.
• While the strategies may be successful, they are not certain.

Pricing Changes

Lowering Prices

By lowering prices, companies hope to lure customers away from competitors. The benefit is a higher market share, but it comes at a cost: lower margins per unit.

This strategy is particularly attractive to large companies that have high economies of scale. This allow them to operate at a lower marginal cost than their competitors. Or it can make it possible to operate at a loss, if necessary.

It’s a risky strategy because, once prices drop, it can be hard to raise them again unless the company regains enough market share to muscle out its competitors.

Everybody likes a good sale, and being able to entice customers to return through lower prices can be an excellent short-term strategy.

But keep in mind that when competitors see lower price sales, they often lower prices in turn. This benefits consumers but can lead to a race to the bottom for businesses.

Promotional Changes

Promoting the Brand

Another way a business can regain market share is to change its methods of promotion. This can include increasing the advertising budget and putting the power of branding to work for the firm.

With this strategy, company leaders must identify the specific issues that need to be addressed to regain market share—the reason(s) it lost it, the customer type that switched, and the right audience to target for its promotional efforts.

Such efforts can be very successful. Or, they can be a costly exercise.

For example, national retailer JCPenney notably struggled with rebranding in the 2010 to 2012 period, while competitor Target (TGT) found success in the early 2000s by marketing itself as a higher-end discount retailer.

The combination of advertising, marketing, and promotion can be a tried and true method of regaining market share. Just keep in mind that advertising is an on-going process and the competition is spending money on advertising as well.

Important

Excellent customer service can cause customers to stick with a business even if prices are better elsewhere. It can also cause customers to jump ship to a competitor with higher prices. So customer service may play a role in helping a company maintain, or regain, market share.

Product Changes

Updating Product Offerings

To regain market share, a company can revamp its offerings to better meet customer needs or to provide something new.

Apple (AAPL) tried this tactic in 2014 by introducing the iPhone 6, a significantly changed version of its smartphone. And it met with great success as a result.

An instant hit, the iPhone 6 enabled Apple to take back some of the market share it had lost to Google’s (GOOGL) Android.

The company has continued its strategy of introducing new iPhone versions periodically, launching iPhone 16 on Sep. 20, 2024 and the less costly iPhone 16e on Feb. 28, 2025.

This strategy can be combined with raising prices to introduce another aspect of differentiation or to position the company’s offering as a premium product.

Necessity may be the mother of invention. But competition may be the spur for noteworthy innovation in the business world.

Coming up with new or updated product offerings may help a company regain market share in the short-term. Yet it has to keep innovating and introducing novel and exciting products that consumers will clamor for to maintain or grow that share.

Why Does Market Share Matter?

It matters because it reflects a company’s sales, which are the key to profitability and success.

What Affects Market Share?

Some things that can affect market share—think sales—are product prices, the introduction of new products, customer satisfaction and loyalty, quality of service provided to customers, innovation, product quality, and advertising.

Can a Company Regain Market Share Once It’s Lost?

Yes, it can. To do so, it must assess the problems that caused the loss and address them effectively with one or more strategies that it believes can change consumer attitudes and support greater sales.

The Bottom Line

In free-market capitalist economies, competition between companies can lead to changes in market share.

When a company loses its market share to a competitor, it can try to regain it by lowering its prices, promoting the brand, and updating its product offering.

While none is guaranteed to work, they’re often used by companies with success.

Stockholders should pay attention to this on a company’s balance sheet

Reviewed by Chip Stapleton
Fact checked by Yarilet Perez

An increase in the total capital stock that shows on a company’s balance sheet is usually bad news for stockholders. It represents the issuance of additional stock shares which dilute the value of investors’ existing shares. The additional capital stock may benefit investors, however, in the form of increased returns on equity through capital gains, higher dividend payouts, or both.

Key Takeaways

• Capital stock is the total amount of stock that a public company is authorized to issue.
• It’s the number of shares that can be outstanding or held by shareholders.
• Capital stock includes both common and preferred stock but preferred stock is less common.
• Increases in a company’s capital stock often result in share dilution.
• An increase can be a good thing if the money raised is used to finance company growth.

What Is Capital Stock?

Capital stock is the total amount of common and preferred stock that a public company is authorized to issue. The difference between common stock and preferred stock is that preferred stockholders receive their share of the assets before common stockholders receive theirs if a company goes bankrupt assuming there’s anything left.

Common stock is what investors usually purchase. Companies don’t always offer preferred stock. A company begins its life with a certain amount of equity shares but it might authorize the creation and issuance of additional shares if it’s approved by the board of directors and existing shareholders.

Capital stock is the number of shares that can be outstanding or held by shareholders. The amount of capital stock that a company issues is usually stated initially in its company charter. This is the legal document that’s used to start a corporation. A company commonly has the right to increase the amount of stock it’s authorized to issue through approval by its board of directors and amendment to the charter, however.

It also has the right to buy back existing shares from stockholders or issue more shares for sale.

Important

Investors can find information about a company’s capital stock in the shareholders’ equity section of its balance sheet.

Disadvantages of Increasing Capital Stock

Increases in the total capital stock can negatively impact existing shareholders because it usually results in share dilution. The company’s diluted EPS figure will drop as the company’s earnings are divided by the new, larger number of shares to determine the company’s earnings per share (EPS).

Benefits of Increasing Capital Stock

Increases in capital stock can ultimately be beneficial for investors despite possible dilution of shares. The increase in capital for the company that’s raised by selling additional shares of stock can finance additional company growth. The ultimate gains in stock price and dividend payouts realized by investors might be more than sufficient to compensate for the dilution of their shares if the company successfully invests the additional capital.

What Is Share Dilution?

Share dilution occurs when a company issues additional shares to more shareholders. The company may have initially issued 10,000 shares. The value of those shares drops by half if the company then issues an additional 10,000 shares. Each existing share represents a smaller percentage of ownership and makes the shares less valuable.

What Are Capital Gains?

An investor realizes a capital gain when they sell an asset for more than their adjusted basis in it. The adjusted basis is typically what they paid for it plus any additional, qualifying costs of owning it.

This has some significant tax implications because capital gains can be taxed at lower rates than ordinary income depending on the duration of the ownership period and the overall wealth of the investor. Capital losses can additionally be subtracted from gains subject to some rules, reducing the taxable amount.

How Are Dividends Paid?

A dividend is effectively a percentage of a company’s profits. An investor who buys a dividend-paying share will receive a portion of the company’s additional profits if the company makes money. Dividends are often paid in cash but they can be in the form of additional stock shares.

The Bottom Line

Investors and analysts become wary when a company continually initiates additional stock share offerings. This often indicates that the company is having difficulty maintaining financial solvency with its current revenues. It may be in constant need of additional financing.

It’s typically a good sign to investors and analysts if a company can issue a significant amount of additional stock without seeing a significant drop in share price, however.

Reviewed by Charlene Rhinehart
Fact checked by Yarilet Perez

Profits vs. Earnings: An Overview

Profits and earnings are often used interchangeably, but they are different. Overall, these terms are primarily differentiated by the adjectives that precede them. For example, net earnings, or gross profit.

The term earnings is most commonly used when discussing the bottom line of a company’s income statement. The term profit is commonly associated with the three most important points on the income statement: gross profit, operating profit, and net profit. These items reflect a company’s operational efficiency.

Key Takeaways:

• Profits and earnings are often used interchangeably, but they reflect different items found in the financial statements.
• Gross profit, operating profit, and net profit are the three main measures analysts evaluate on an income statement.
• The net earnings are found on the bottom line of an income statement.
• Net earnings show the total earnings a company has achieved after subtracting all expenses. 
• The net earnings value carries over into the balance sheet and cash flow statement for a company’s reporting period.

Profits

The gross profit margin, operating profit margin, and net profit margin are three key profit measures. Analysts use this data to analyze a company’s income statement and operating activities. The adjectives “gross,” “operating,” and “net” describe three distinctly different profit measures that help to identify the strengths and weaknesses of a company.

Gross Profit

Gross profit, which is used to calculate gross profit margin, is a measure that analyzes a company’s cost of sales efficiency. The costs of sales figures include only direct expenses involved in generating a company’s products. The higher the gross profit and gross profit margin, the more efficiently a company is creating the core products that build its business.

Operating Profit

Operating profit is an analysis of a company’s indirect costs. Operating profit is in the second section of an income statement. The operating profit is calculated by subtracting all of a company’s indirect costs from the gross profit.

An analyst can see what types of endeavors a company is taking on to help grow the business from the indirect costs. For example, indirect costs associated with operating profit margin may include marketing campaign expenses, general and administrative costs, and depreciation and amortization.

The operating profit margin is calculated by dividing operating profit over sales. This ratio allows an analyst to compare a company’s gross profit efficiency versus operating profit efficiency and to see how direct cost management differs from indirect cost management.

Net Profit

Net profit is calculated from the final section of an income statement. It is the result of operating profit minus interest and taxes, with interest and taxes being the last two factors to influence a company’s total earnings. Net profit is used in the calculation of net profit margin, which gives the final portrayal of how much a company is earning per dollar of sales.

Note

Common profitability ratios include gross profit margin, operating margin, return on equity, EBITDA margin, and earnings per share (EPS).

Earnings

Earnings are most commonly associated with a company’s bottom-line results. The bottom line shows how much a company has earned after subtracting all of its expenses. This measure can be referred to as net profit, net earnings, or net income.

The net earnings of a company are the earnings after all expenses have been subtracted. Net earnings are then used to calculate a company’s earnings per share (EPS), which portrays a company’s earnings based on the number of publicly traded equity shares it has outstanding.

Overall, earnings are the net value a company has achieved from operating activities for a specific reporting period. Companies also portray their net earnings by dividing it over shares outstanding when identifying the earnings per share (EPS) value.

The net earnings of a company theoretically reflect an accounting value for a specific period. After the net earnings are calculated, this value flows through to the balance sheet and cash flow statement.

On the balance sheet, net earnings are included as retained earnings in the equity section. Retained earnings for the balance sheet are calculated as beginning retained earnings plus net income minus dividends. On the cash flow statement, the net earnings begin the top line of the operating activities section.

Special Considerations

The terms profit and earnings should be evaluated in context. Gross profit and operating profit are terms used to analyze the first two segments of a company’s income statement.

The bottom line, net earnings, will have a different connotation. Net earnings can also be expressed as net income or net profit. The net earnings of a company provide the most comprehensive measure of a company’s performance after all expenses are subtracted.

Ultimately, net earnings may be the most important number on the income statement because it comprehensively shows the company’s total earnings performance and the value carried over to the balance sheet and cash flow statement.

What Is the Difference Between Revenue and Profit?

Revenue is all the money a business earns from sales. Profit is what is left after subtracting all of the costs a business incurs, such as supplies, rent, and utilities. For example, if you sold 20 glasses of lemonade for $5 each, your revenue would be $100. If your costs to make and sell those 20 glasses of lemonade, including sugar, lemons, and cups cost $2 for each glass, your total costs would be $40. Your profit would be $60 ($100 – $40 = $60).

What Is EBITDA?

EBITDA stands for “earnings before interest taxes depreciation and amortization.” It is a profitability measure to assess how much money a business is making through its core operations. It excludes the above costs which can vary based on accounting methods, tax situations, and financing decisions. It helps to know how a company is doing without these other variables and it makes comparison between companies easier.

What Is Earnings Per Share (EPS)?

Earnings per share (EPS) is a financial metric that compares a company’s earnings to the number of shares of common stock outstanding. It is calculated as a company’s net income divided by the total number of common shares outstanding. Investors and analysts use EPS to understand how much profit a company is generating from each share. A higher EPS is generally better.

The Bottom Line

The difference between profit and earnings is the specific financial metrics they represent. While profit appears in multiple forms (gross, operating, and net), earnings usually refer to the bottom line figure after all expenses are deducted. Each provides important insight into a company’s financial health.