- The income statement contains two items,
revenues and expenses.
Revenues minus expenses equals net income, that's it.
That's the income statement.
But, what does the word revenue mean?
The meaning is kind of subtle, but important.
Revenue is the amount of assets created
from the sale of goods or services.
Let's say that you have a $100 bill.
That's an asset.
Now, where could you have obtained that asset?
Well, you could've borrowed it from somebody.
Then we call the source of that asset a liability.
Or you could've taken it from your personal savings,
in which case we call the source
of that asset paid-in capital.
Or you could have gone out and done some work
and earned the $100.
If you generate the asset through profitable efforts,
then the source of that asset is revenue.
People often have difficulty mixing these two together,
asset and revenue.
There's the asset, the $100,
and there's the source of the asset,
borrowing, personal investment, or work.
Revenue tells us that the company obtained
some of its assets through work,
through providing value to its customers.
So how do companies generate assets
through business operations?
Well, that depends on what the business is.
Microsoft, for example, generates assets
by collecting it from you and me
through selling software and hardware.
We call that Microsoft's revenues.
How does Walmart generate assets through doing business?
Well, they sell products to you and me
and they sell us membership in their Sam's Club.
So that's the way Walmart generates assets
through doing business.
Those are Walmart's revenues.
Revenues are ways that companies generates assets
through doing business.
And whatever your company is,
that's the way you're going to generate revenue.
This differs depending on what industry you're in.
Now, net income is revenues minus expenses.
As discussed, revenues are the amount of assets generated
through business operations.
Similarly, expenses are the amount of assets consumed
through business operations.
For example, for Microsoft,
in order to generate those revenues
by selling software and hardware to you and me,
they have to pay programmers, they use equipment,
they have to pay for electricity,
they have to pay for maintenance on all their facilities.
Paying for those items consumes assets.
Those are expenses.
For Walmart, what's their major expense?
Their major expense is the cost of the goods
that they sell to you and me.
On average, if Walmart sells something to you and me
for a dollar, that thing cost them about 75 cents.
So that 75 cents is an expense.
The amount of assets consumed in generating revenues.
So what are expenses for McDonalds?
Well, they have to buy the food
that they then sell to you and me.
They have to buy the paper and the packaging
that they give to you and me.
They have to pay the employees
that are working behind the counter.
Those are all expenses involved in generating revenues.
Revenues are the amount of assets generated
in doing business.
Expenses are the amount of assets consumed
in doing business.
Net income, that equals revenues minus expenses.
That's the net amount of assets generated in doing business.
It truly is as simple as that.