Final answer:
Net income is calculated by subtracting total expenses from total revenues. The accurate answer to the student's query is Option 1) revenues, expenses. It does not involve assets or liabilities, which are part of a separate financial statement analysis process.
Step-by-step explanation:
Net income (or loss) is the result of netting together the revenues recognized and the expenses incurred during the current reporting period. Hence, the correct answer to the student's question is Option 1) revenues, expenses. This is a fundamental accounting concept where revenues represent the income generated from the activities of a business during a specific period, such as sales of goods or services. Expenses are the costs incurred to generate these revenues, such as rent, salaries, and utilities. The difference between total revenues and total expenses is referred to as net income if positive, or net loss if negative.
The understanding of this concept is important for analyzing the financial health of an entity. A T-account helps to visualize this process by showing the relationship between a company's assets, liabilities, and net worth. However, net income calculation is based solely on the revenues and expenses and does not directly involve the firm's assets and liabilities.