1. The Definitions
* Revenue: Income. Increases Profit.
* Expense: Costs. Decreases Profit.
* Asset: Resources owned.
* Liability: Debts owed.
2. The Depreciation Disaster
Imagine you have $5,000 in Earnings and $1,000 in Depreciation (expense).
* Correct (Expense): $5,000 - $1,000 = $4,000 Profit.
* Wrong (Revenue): $5,000 + $1,000 = $6,000 Profit.
Labeling an expense as revenue makes the system "add" the loss to your profit!