Is Revenue Before or After Expenses?

Understanding a business’s financial performance involves looking at key figures. Financial statements offer insights into a company’s well-being, and grasping how money is earned and spent forms the basis for interpreting these documents and understanding financial health.

Defining Revenue

Revenue represents the total money a business generates from its primary activities before any costs are subtracted. It is the gross inflow of economic benefits arising in the course of an entity’s ordinary activities. For many businesses, this income comes directly from selling products or providing services. For instance, a retail store earns revenue from selling goods, while a consulting firm generates revenue from the services it renders to clients. This figure is often called the “top line” because of its prominent position at the beginning of a company’s financial statements.

Revenue can also come from other sources not directly tied to core operations, such as interest earned on investments, rental income from property, or royalties from intellectual property. These are categorized as non-operating revenue. Regardless of its source, revenue is an indicator of a business’s ability to attract customers and generate sales.

Defining Expenses

Expenses are the costs a business incurs to generate its revenue and operate effectively. These are the outflows of economic benefits that occur during the course of ordinary activities. Businesses face a variety of expenses, ranging from the direct costs associated with producing goods or services to the general costs of running an office. Common examples include salaries and wages for employees, rent for office space or facilities, utility bills, and the cost of raw materials or inventory.

For example, a bakery incurs expenses for flour, sugar, and oven maintenance to produce its goods. Expenses reduce a company’s profits, as they represent the outflows that offset the inflows of revenue. Managing these costs helps maintain financial health.

The Income Statement Structure

The income statement, also known as a profit and loss (P&L) statement, is a financial report that summarizes a company’s revenues, expenses, gains, and losses over a specific period, typically a month, quarter, or year. Its main purpose is to show whether a business made a profit or incurred a loss, making it fundamental for understanding financial performance.

On an income statement, revenue is always presented first. This is why revenue is frequently referred to as the “top line.” Following the revenue, various expenses are listed and then subtracted to arrive at the net income, often called the “bottom line.” The basic formula is straightforward: Revenue minus Expenses equals Net Income (or Loss). This structured presentation allows stakeholders to easily see how revenue is converted into profit.

Consider a simple example: a small online shop selling handmade crafts. If the shop sells $1,000 worth of crafts in a month, this $1,000 is its revenue. To create these crafts and run the shop, the owner might have expenses like $200 for materials, $150 for website hosting and marketing, and $50 for shipping supplies. These expenses total $400.

On the income statement, the $1,000 revenue would be listed first, followed by the $400 in expenses. Subtracting the expenses from the revenue ($1,000 – $400) reveals a net income of $600 for the month.