Business & Accounting, From Revenue to Break-Even

The sales chart points up and the press release brags about record profit — yet the payroll account is running on fumes. Accounting is the language that lets all three be true without anyone lying.

Follow one dollar from the customer's card through costs, invoices, and equipment, and the three big statements stop being a maze. These twenty-one terms are the trail markers.

From Sale to Profit

Profit isn't one number — it's a staircase, and each step subtracts something new. Walk it top to bottom.

• Revenue: Revenue is money a business recognizes from its ordinary sales, before any costs come out.
• Cost: Cost is the money or value given up to buy, build, or operate something.
• Gross Profit: Gross profit is revenue minus the direct cost of the goods or services sold.
• Operating Profit: Operating profit is what the core business keeps after direct costs and regular operating expenses.
• Net Income: Net income is the bottom line — what's left after operating costs, interest, taxes, and everything else recognized.

Cash Is Its Own Story

Profit is an opinion shaped by accounting rules; cash is a fact. These two terms track the fact.

• Cash Flow: Cash flow is the actual movement of cash into and out of a business or household.
• Free Cash Flow: Free cash flow is the cash left after spending on long-lived assets — money the business could return or reinvest.

The Three Statements

Every public company tells its story in the same three documents. Each answers a different question.

• Balance Sheet: A balance sheet lists assets, liabilities, and equity at one specific date. It's a snapshot, not a movie.
• Income Statement: An income statement reports revenue, expenses, gains, losses, and profit across a period.
• Cash Flow Statement: A cash flow statement sorts cash movement into operating, investing, and financing buckets.

Money in Motion Between Companies

Businesses rarely pay each other on the spot — value moves first and cash follows. That lag is where these four live.

• Accounts Receivable: Accounts receivable is money customers owe for goods or services already delivered on credit — sales you haven't been paid for yet.
• Accounts Payable: Accounts payable is money a business owes suppliers for goods or services already received.
• Trade Credit: Trade credit is the buy-now-pay-later handshake between businesses.
• Inventory: Inventory is the goods and materials a business holds for production or sale.

What the Owners Actually Hold

Subtract what a company owes from what it has, and whatever's left belongs to the owners. Three terms measure that leftover.

• Equity: Equity is the value left for an owner after liabilities are subtracted from assets.
• Shareholders' Equity: Shareholders' equity is that same leftover on a corporation's books — recorded assets minus recorded liabilities.
• Working Capital: Working capital is current assets minus current liabilities — the short-term breathing room.

Accounting's Fine Print

A few conventions bend how the numbers look without changing the business underneath. Know them and fewer headlines will fool you.

• Depreciation: Depreciation spreads the recorded cost of a tangible long-lived asset across its useful life instead of expensing it all at once.
• EBITDA: EBITDA is earnings before interest, taxes, depreciation, and amortization — profit with several big bills set aside.
• Fiscal Year: A fiscal year is the twelve-month or similar annual period an organization uses for accounting and reporting.
• Break-Even Point: The break-even point is the sales level where total revenue finally equals total cost.

See Them in the Wild

The fastest way to make these stick is to watch them work on a real company. Learn how to read financial statements, then use them to spot a good investment before the crowd does.

Open any public company's latest report and count how many of these you now recognize on sight.