> ## Documentation Index
> Fetch the complete documentation index at: https://docs.lerian.studio/llms.txt
> Use this file to discover all available pages before exploring further.

# Revenue, expenses & costs

> What revenue, expenses, and costs are, told apart in plain language: the words that drive the Income Statement and why the difference matters.

Two words show up everywhere in accounting: **revenue** and **expenses**. They're the money a business *earns* and the money it *spends*. Get these two straight and the [Income Statement](/en/start-here/fundamentals/accounting/financial-statements), the report that says whether you made a profit, reads like a simple subtraction.

## Revenue: the money you earn

***

**Revenue** is the amount a business earns from doing what it does: selling a product, providing a service, charging for a subscription. A business recognizes revenue when it earns it. That moment may differ from the moment cash arrives.

Picture a bakery. Every loaf it sells brings in revenue. Add up a day's sales and that total is the day's revenue. Everything else measures against that inflow.

Revenue is about **what you earned**, not necessarily the cash sitting in your account today. [Accrual vs. cash](/en/start-here/fundamentals/accounting/accrual-vs-cash) covers that difference. For now, think of revenue as *money earned from the work*.

## Expenses: the money you spend to earn it

***

An **expense** is a cost a business recognizes in a period to keep running and earn revenue: rent, salaries, electricity, flour for the bakery. It may or may not involve a cash payment in that same period.

Expenses are the fuel. You can't sell bread without buying flour and paying the baker. The point of accounting is to know what they are, so you can tell whether the revenue was worth it.

## Cost: close to expense, but not identical

***

People use **cost** and **expense** as if they mean the same thing, and in casual talk they nearly do. The distinction is small:

* A **cost** is what you *pay* for a resource: the price of acquiring it. Buying an oven for the bakery has a cost.
* An **expense** is a cost *counted against the revenue of a period*: the portion that's "used up" in earning this stretch's income. The flour baked into today's bread is an expense today.

A **cost** becomes an **expense** once it's used up in the work of earning revenue. The oven is a cost when you buy it. The slice of its wear-and-tear that helped make this month's bread becomes an expense this month.

| Term        | Plain meaning                                | Bakery example                             |
| ----------- | -------------------------------------------- | ------------------------------------------ |
| **Revenue** | Money earned from the work                   | Selling loaves                             |
| **Cost**    | What you pay to acquire something            | Buying the oven                            |
| **Expense** | A cost used up to earn this period's revenue | The flour baked today, the rent this month |

"Cost" leans toward *acquiring*, and "expense" leans toward *using up to earn revenue*. Follow one bag of flour through the bakery and the whole chain falls into place:

```mermaid theme={null}
flowchart LR
    A["Buy flour<br/><b>cost</b>"]:::cost --> B["Bake the bread<br/><b>expense</b>"]:::expense
    B --> C["Sell the bread<br/><b>revenue</b>"]:::revenue
    C --> D["Revenue − expenses<br/><b>profit or loss</b>"]:::profit
    classDef cost fill:#fef9c3,stroke:#ca8a04,color:#713f12
    classDef expense fill:#fed7aa,stroke:#ea580c,color:#7c2d12
    classDef revenue fill:#dbeafe,stroke:#2563eb,color:#1e3a8a
    classDef profit fill:#dcfce7,stroke:#16a34a,color:#14532d
```

## Why they matter to the Income Statement

***

These two words are the entire engine of the [Income Statement](/en/start-here/fundamentals/accounting/financial-statements):

* Start with **revenue**: the amount recognized as earned.
* Subtract **expenses**: the costs recognized for that period.
* What's left is **profit** (or, if expenses were bigger, a **loss**).

A month at the bakery, in one line:

$$
\underbrace{\$1{,}000}_{revenue} - \underbrace{\$700}_{expenses} = \underbrace{\$300}_{profit}
$$

This is a simple view. Revenue minus expenses tells you whether the business reported profit or loss over a period. A full statement can group and present those amounts in more detail.

That profit flows into **equity**. Earn a profit and, before any distributions to owners, the owners' stake in the business grows. Run a loss and it shrinks on the same basis. This links back to [Assets, liabilities & equity](/en/start-here/fundamentals/accounting/assets-liabilities-equity): the Income Statement is the story of *how* equity changed over a period.

## Next steps

***

<Note>
  **Next up**

  See how you write down every change to the five account families in [Debits and credits](/en/start-here/fundamentals/accounting/debits-and-credits).
</Note>