A second accounting equation shows the relationship between revenues and expenses

Revenues – Expenses = Net Income (Net Loss)

If expenses exceed revenue, we refer to this as a “Net Loss”

Going back to our definition of equity, equity is the amount of earnings retained by the company.  Each year, net income gets added to equity. If a company reported a loss, it would be deducted from equity.

Since net income increases equity, we can also say that revenue increases equity and expenses decrease equity.