EBT Accounting: Definition & Formula

What is EBT (Earning Before Tax)?

EBT (Earning Before Tax) is an accounting term used to calculate a company’s total net income before paying taxes. This figure also helps determine the amount of taxes the organization must pay. You might also refer to EBT as pre-tax earnings, operating income, or profit before tax.

The EBT accounting can help determine how much money the company has to work with and how much it will owe in taxes. EBT is also used to measure a company’s profitability, showing how much money is left over after the company pays all costs. 

EBT Formula in Finance

The formula for calculating EBT is as follows:

EBT = Revenue – Expenses (excluding taxes)

Revenue consists of all incomes received from the sale of goods, services, and any other sources. Expenses are costs incurred by a business to generate revenue. These expenses exclude taxes that you must pay to governments.

Earning Before Tax Example

you can find an example of EBT in a small business that sells products online. This business incurs expenses such as the cost of the products it sells, shipping costs, and payment processing fees to generate revenue. Before taxes are taken out, this business has earned $100 in revenue. However, it has also incurred expenses of $90, resulting in an EBT of $10.

What’s the difference between EBIT and EBT?

The main difference between EBIT and EBT is that EBIT includes the impact of taxes, while EBT does not. You can calculate EBIT by subtracting total expenses from total revenue, including tax expenses. This gives a more accurate representation of a company’s profits.

EBT, on the other hand, only considers revenue and expenses unrelated to taxes. This can give a misleading picture of a company’s profitability, as it needs to consider the amount of money owed to the government.

Another difference between EBIT and EBT is that EBIT is always positive, while EBT can be damaging if a company incurs more expenses than it generates in revenue.

Next Steps

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