Revenue, expenses and profit
What revenue, expenses and profit (net income) are, and why a busy business can still lose money. Includes what does not count as revenue, such as a bank loan.
Revenue
Revenue is the money a business earns by selling to its customers. For Rosa that’s every latte, muffin and office catering order. Accountants also call it sales, or the “top line”, because it sits at the top of the income statement.
Tell me moreTell me less
Revenue counts what customers paid for, not every dollar that arrives. A bank loan, money Rosa puts in from her savings or a tax refund all bring cash in, but none of them is revenue: nothing was sold.
Revenue is recorded after discounts and refunds. If a latte lists at $5 but loyalty members pay $4.50, the café’s revenue from that cup is $4.50. Large companies also split revenue by product or region, so you can see where the money comes from.
Expenses
Expenses are what it costs to keep the doors open: beans, milk, rent, wages, the electricity bill. They’re the reason a café can be packed every morning and still struggle.
Tell me moreTell me less
Accountants sort expenses into groups. Cost of goods sold (COGS) is the direct cost of what was sold: the beans and milk in each latte. Operating expenses keep the business running whatever it sells: rent, wages, marketing. After those come interest on loans, and taxes.
Some costs are fixed: rent is the same in a quiet month. Others are variable: milk rises with every cup. A business with high fixed costs needs a lot of sales just to break even, but past that point most of each extra sale is profit.
Profit
Profit is what’s left of revenue after every expense is paid. Accountants call it net income, or the “bottom line”. If expenses are bigger than revenue, it’s a net loss.
Tell me moreTell me less
Profit comes in layers. Gross profit subtracts only the cost of goods sold. Operating profit also subtracts running costs like rent and wages. Net income subtracts everything, including interest and taxes. When someone quotes “profit”, ask which one they mean.
Profit is not the cash in the bank. A business can be profitable and still run out of money, for example when customers pay late. That gap gets its own chapter.
Key terms
- Revenue
- Money earned from customers. Also called sales or the “top line”.
- Expenses
- The costs of running the business.
- Profit
- Revenue − Expenses. Also called net income or the “bottom line”. Negative = a loss.
This chapter is free. Play it: 6 puzzles, unlimited retries.
Play “Revenue, Costs, Profit” →