Revenue can be defined as the amount of money that a business is able to earn in its normal course of business by selling its goods and services and in the case of the federal government, it is the total amount of income that is generated from taxes, and this remains unfiltered from any deductions. It is an unfiltered amount of money, i.e., gross amount (not accounted for deductions) earned by an organization or a government.
The companies earn their major sales from their core business operations, i.e., operating revenue – can mainly be earned either from the sale of the goods or by providing the services to the customers.
The formula to calculate the revenue in those cases is as follows:
From Sale of the Goods
From Rendering the Services
Types of Revenues
There are broadly two types of sales that are earned by the company, which includes the following:
- Operating – The companies earn it from the core operations. Examples of such revenue include the sale of goods or the provision of the services.
- Non-Operating – It is earned by the companies from the non-core operations, i.e., from the side activities of the business. The examples include sales from renting the property, from interest, from the dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company., from royalties, etc.
How is Revenue Calculated?
When categorized broadly, the company can earn it from the two different sources, i.e., from core business activities (operating) and from non-core business activities (non-operating). All the revenues calculation is in different ways, as mentioned below:
#1 – Operating Revenue
Further, the operating sales can mainly be generated either from product sales or from rendering services.
Sale of the Goods
- For calculating it from the sale of goods first, the company needs to calculate the number of units sold during the period.
- After that, calculate the average price per unit.
- Lastly, the number of units sold is multiplied with the averageAverageThe average value represents the set of data values; the average from the whole data is calculated by adding all the set values and dividing them by the number of values. Average = (a1 + a2 + …. + an)/n price per unit. It gives the revenue earned from the sale of goods.
- If there are different segments of the company, then earning from each segment is added together at last to derive the total revenue.
Rendering the Services
- For calculating it from the provision of the services, first, calculate the number of customers that avail the services during the period.
- After that, calculate the average price of the service.
- Lastly, multiply the number of customers that avail the services with the average price of the service. It will give the revenue company earns from the provision of the services.
#2 – Non-Operating Revenue
It is the amount actually receivable from non-business activities, e.g., Rent. Rent is calculated by multiplying the number of the period for which the property is given on rent, with the amount of rent to be received for each period.
Example of Revenue
For example company, A ltd manufactures and sells printers of three different segments in the market. For the year 2018, it sold 100,000 segments 1 printer at the average price of $1,000 each, 80,000 segments 2 printers at the average price of $1,800 each and 50,000 segment 3 printers at the average price of $3,000 each. Calculate the total revenue of the company for the year 2018.
Step 1: Determining the Number of Units Sold During the Period
- Segment 1: 100,000 units
- Segment 2: 80,000 units
- Segment 3: 50,000 units
Step 2: Determining Average Price Per Unit
- Segment 1: $1,000
- Segment 2: $1,800
- Segment 3: $3,000
Step 3: Calculating Earnings from Sale of Goods
Total Sales from Segment 1
Revenue = Average Price Per Unit * Number of Units Sold
Total Sales from Segment 2
Total Sales from Segment 3
- =50,000 * $3,000
- = $ 150,000,000
Step 4: Determining Total Revenue in the Year 2018
Total Revenue =Sales from Segment 1 + Sales from Segment 2 + Sales from Segment 3
- = $100,000,000 + $144,000,000 + $ 150,000,000
- = $ 394,000,000
Revenue vs Income
Revenue is the gross amount of money that a company earns. While income is the net or final amount of money that a company earns. It is calculated by adding up all the profits and ignoring all the deductions or expenses while income is calculated by adding all the revenues and deducting all the expenses like depreciation, taxes, interest, cost of doing business, etc.
Why is Revenue Important?
They are highly important since it indicates the efficiency of an entity with respect to generating sales and earning profits. Without it, a company will not be able to earn profits and stay consistent in the long run. It also helps an organization in identifying its strengths and weakness and accordingly design measures to grow and become stronger.
With strong sales models, it becomes easier for a company to build a positive reputation in the eyes of the stakeholders. Creditors, lenders, and suppliers, too, can judge the credibility of an organization on the basis of its revenue model.
It is the total amount of profits that a business earns in its ordinary course of business that is by selling off its goods and services. It can be better understood as the gross profitsThe Gross ProfitsGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services. since the same is at s stage where it remains unprocessed from any deductions or expenses.
Revenue is different from income as income comes at a later stage and accounts for all the necessary deductions. With revenue, an organization can enhance its credibility and leverage its growth too.
This article has been a guide to Revenue and its Meaning. Here we discuss the formula to calculate revenue along with an example, its types, and its differences from income. You can learn more about accounting from following articles –