Duțescu, A., Olimid, L., Financial Accounting, Editura CECCAR, București, 2004.

The next two elements of financial statements are coupled with an enterprise’s
performance: Conceptual frameworks define revenues and expenses by referring to assets,
liabilities and equity, elements already explained.
Income represents increases in economic benefits that augment equity and are not
contributions from owners. If we refer to the algebraic formula above, equity expands when
assets increase, or liabilities decrease as part of the enterprise’s operations or from other
events. Income occurs simultaneously to the increase of assets such as cash or debtors in the
case of a straightforward sale or at the same time with the decrease of a liability if the sale is
made in settlement of that liability.
Income arising from the ordinary activities of a company is called revenue, whereas
income that rather occurs from other events is known as gains. For a car manufacturer, the
sale of spare parts is described as revenue, but the profitable sale of an outdated assembly line
is disclosed as a gain. As we have previously discussed, revenue and related expense are
generally not offset in the profit and loss account: the revenue from sale (the sale price of the
spare parts) and the related expense (the cost of the spare parts sold) are reported separately.
Nevertheless, in Anglo-Saxon accounting, the gain from the sale of the assembly line (its sale
price) is reported net of the associated expense (the carrying amount of the assembly line) so
that only the profit made on this transaction is visible in the profit and loss account.
Expenses are decreases in economic benefits that reduce equity and are not
distributions to owners. Equity declines when assets decrease or liabilities increase as a result
of production activities, development of the business or from other events. Expenses occur
concurrently to decreases of assets, i.e. when materials are used in production. Expenses also
occur when liabilities increase due to the purchase of various services and because of tax
obligations. Although losses are expenses that may arise from the ordinary activities of an
enterprise, it is rather other events that account for their incidence. For the same car
manufacturer above, the cost of the spare parts sold is an expense, while the stock of spare
puts destroyed by a fire is reported as a loss.
As a consequence of these definitions, profit can be calculated in two ways:
PROFIT = EQUITY 1-EQUITY 0
where 0 and 1 are two consecutive moments in time.
PROFIT = INCOME - EXPENSES