Net income equals

• A. Revenues minus Expenses
• B. Assets minus Liabilities
• C. Revenues plus Expenses
• D. Expenses minus Revenues

Answer: (A)

Net income is the profit left after subtracting what the business spends (expenses) from what it earns (revenues). In other words, net income = revenues minus expenses.

Think of it as the amount that increases retained earnings and owners’ equity when the revenues exceed the costs of running the business. For example, if a company earns 120,000 in revenues and incurs 85,000 in expenses, net income would be 35,000. If expenses were higher than revenues, the result would be a net loss.

Choosing the other ways to combine these figures isn’t correct because you don’t add expenses to revenues, and you don’t subtract revenues from expenses in the way that would yield the net income. Also, assets minus liabilities reflect equity, not net income, so that option isn’t about profit.