Revenue refers to a firm’s total earnings from primary business operations such as sale of goods or services rendered. It is shown as a top-line item in the income statement and is often referred to as gross sales.
It is an unfiltered amount of money—the gross amount earned by an organization or a government without accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements. for deductions. In other words, it is the inward flow of cash generated from business activities. Moreover, it reflects the financial standing of a business—gross salesGross SalesGross Sales, also called Top-Line Sales of a Company, refers to the total sales amount earned over a given period, excluding returns, allowances, rebates, & any other discount. represent a positive cash flow.
Table of contents
- Revenue or gross sale of a firm refers to the cash inflow derived from its primary business operation—the sale of products or services rendered. The formula is as follows.
Revenue formula = Average Unit Price × Number of Units Sold/ Number of Customers Served
- In addition, companies earn money from various secondary sources—non-operating income. This includes rents, interests, dividends, commissions, and royalty.
- For the government, revenue refers to income tax, penalties, fines, grants, and sale of bonds.
Revenue is the gross amount of money that a company earns. It is the company’s income before deducting any cost or expenseExpenseAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.. Net incomeNet IncomeNet income for individuals and businesses refers to the amount of money left after subtracting direct and indirect expenses, taxes, and other deductions from their gross income. The income statement typically mentions it as the last line item, reflecting the profits made by an entity., on the other hand, is the final amount of money that a company earns.
Revenue is also referred to as gross sales. Gross sales indicate the efficiency of an entity. Therefore, an increase in a firm’s gross sales over a period results in higher profits—more earnings per shareEarnings Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is. (EPS). In addition, a strong revenue model makes it easier for a company to build a positive reputation in front of the stakeholders.
The sources of revenue vary from industry to industry. Unlike governments, businesses generate income from completely different sources. Let us see how.
#1 – For a Business Entity
Businesses generate income in the following two ways:
- Primary Source: The major income of a company is acquired from selling the products or services to the customer—core business operationBusiness OperationBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation..
- Secondary Source: Firms undertake many alternative activities—renting, leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”, royalty fees, interests, dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity., commissions, and sale of assets.
#2 – For the Government
The government acquires funds through the following sources:
- Taxes: The government collects multiple direct and indirect taxesIndirect TaxesIndirect tax, also known as consumption tax, is the type of tax the person does not directly bear. In contrast, the incidence of such taxes is passed on to the end consumer of goods or services by adding such taxes to the value of those goods or services, like Excise duty, Service tax, VAT, etc. at the local, state, and central levels—income tax, excise duty, etc.
- Income from Public Sector Units: Services like bus, train, electricity, water supply, and the postal service generate income.
- Fees: Governments charge various registration and licensing fees.
- Donation and Grants: The government receives donations for social causes, relief funds, and various other grants.
- Printing Paper Money: When the central bank prints new notes, it adds to the government’s surplus.
- Fines and Penalties: The police and traffic departments charge various penalties and fines from offenders.
- Sale of Securities and Bonds: Governments raise capital by offering bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period. and securities to the public.
Types of Revenue
It is subdivided into two types.
- Operating Revenue: It is the income generated from core business activities—the sale of goods or services rendered.
- Non-Operating Revenue: It is the income generated from secondary sources—unrelated to the primary business activity. Rents, interests, dividends, and royalty come under non-operating incomeNon-operating IncomeNon-Operating Income, also called Peripheral Income, is the capital amount that a business earns from non-core revenue-generating activities. The examples include profits/losses from a capital asset sale or Foreign Exchange Transactions, Dividend Income, Lawsuits losses, & Asset Impairment losses, etc. .
In addition, based on the payment of a transaction, total earnings are categorized as follows:
- Accrued Revenue: When one party fulfills their part of the transaction—handing over the goods or providing services to the customer, but the other is yet to make the payment, it is termed as accrued incomeAccrued IncomeAccrued Income is that part of the income which is earned but hasn't been received yet. This income is shown in the balance sheet as accounts receivables..
- Deferred Revenue: Here, the customer pays the firm beforehand. Thus, the company is yet to deliver the goods or services (in exchange for the advance paymentAdvance PaymentAdvance payment is made by a buyer to the seller before the actual scheduled time of receiving the goods and services. It protects the seller from the risk of non-payment. Additionally, it helps sellers financially in the production of the goods or rendering of services.).
The formula for the revenue of a company offering goods is as follows:
Revenue = Average Unit Price x Number of Units Sold
The formula for companies providing service is:
Revenue = Average Unit Price x Number of Customers Served
Calculation of Revenue
As we go through the above formulas, we can observe that in the case of a company engaged in rendering services, the number of units sold is substituted with the number of customers served.
The fundamental steps for calculating revenue are as follows:
- First, the company needs to calculate the number of units sold or the number of customers served during a certain period.
- Then, calculate the average unit priceUnit PriceUnit Price is a measurement used for indicating the price of particular goods or services to be exchanged with customers or consumers for money. It includes fixed costs, variable costs, overheads, direct labour, and a profit margin for the organization..
- Finally, find the product of the average unit price and the number of units sold/number of customers served.
- If there are different segments/divisions of the company, then individual earnings from each segment are added together to derive gross sales.
Let us look at some examples to better understand the practical applications of revenue.
Let us assume that A ltd. sells printers in three different types. For the year 2021, its sales were as follows:
- 100,000 type 1 printers were sold for an average price of $1,000 each,
- 80,000 type 2 printers were sold at an average price of $1,800 each and
- 50,000 type 3 printers were sold at the average price of $3,000 each.
Calculate the 2021 revenue for the company.
|Type||Average Unit Price ($)||Number of Units Sold||Revenue = Average Unit Price Number of Units Sold|
The gross sale of A Ltd. is $394000000.
B Communications Ltd. provides telephone network service to its clients. In 2021, it served 300000 consumers and charged $5 for each of them. Determine the total earnings of the company.
Revenue = Average Unit Price × Number of Customers Served
= $5 X 300000
Total earnings of B Communications Ltd. are $1500000.
In 2021, Acer Inc. reported $718.06 million in revenue; it is the total income from different segments—PCs, gaming lines, monitors, desktops, and Chromebooks.
Frequently Asked Questions (FAQs)
Revenue is the culmination of a firm’s earnings from its core business activities—product sales and services rendered. The other sources of income are non-operating transactions—receipt of interest, rent, commission, and royalty fees.
Although revenue is often written as sales on the income statement, in general, both these terms have little difference. The former is a broader term that includes all the business income generated from various sources. Sales, however, are the proceeds that an organization specifically reaps from its core business activities—offering products or services to customers for money.
The terms cost and gross sale are closely related since business entities determine their profit by deducting the cost of goods sold from revenue.
This article has been a guide to Revenue and its Meaning. Here we discuss the formula to calculate revenue along with examples, sources, and types. You can learn more about accounting from the following articles –