Revenue is an accounting term denoting income generated from the sales of goods and services. Companies also call it sales, and it appears on a set period’s income statement. Governments refer to income tax revenue as internal revenue, collected from taxpayers by a department of revenue, such as the IRS. Revenue is one of the critical measures of a company’s performance and is monitored closely to see whether it meets expectations.
What Does Revenue Mean?
Ultimately, companies must make money to survive. They do so through business activities. As the Harvard Business School explains, revenue is the accounting figure for the total amount a company earns by selling something – goods and services – before subtracting the costs of doing business.
How to Calculate Revenue (Formulas and Examples)
Revenue is expressed as gross or net depending on what factors are included. The formula for gross revenue (also called gross income) is:
Gross Revenue = Quantity Sold x Unit Price
Quantity sold is the number of goods or units of service (together called “output”) sold to customers. Unit price is how much the company typically charges for a fixed quantity of output. The price may be wholesale or retail depending on how the company operates.
For example, a steelmaking company may sell one metric ton of hot-rolled steel for $800, the unit price. If it sells 10 million tons for the year, its gross revenue will be (10 million tons x $800/ton), or $8 billion.
Net revenue is the result of certain adjustments applied to gross revenue. The general formula for net revenue is:
Net Revenue = Gross Revenue - Discounts - Allowances - Returns
Discounts are the cost of sale incentives that reduce the selling prices of goods or services. Allowances are the cost of reductions in selling prices to induce customers to retain purchases of defective goods or services. Returns are the cost of items returned by customers in exchange for a refund, replacement or credit.
For example, a wine retailer has an annual gross revenue of $3 million based on the regular retail selling prices of goods. Discounts, allowances and returns are $50,000, $3,000 and $20,000, respectively. The store’s net revenue for the year is ($3 million - $50,000 - $3,000 - $20,000), or $2.927 million.
Total revenue is the sum of operating and nonoperating revenues. You can also derive it as follows:
Total Revenue = Net Profit + Total Expenses
What Are the Main Types of Revenue?
In addition to gross and net revenues, there are several other ways to classify revenue, including:
- Operating revenue: Revenue a company generates from its core operations, such as selling goods, collecting rent or rendering services.
- Nonoperating revenue: A company earns nonoperating revenue from activities unrelated to core operations, such as selling assets or earning interest.
- Accrued revenue: Revenues earned on the sale of goods or services not yet paid for by customers. The Financial Accounting Standards Board states that a company that uses accrual accounting should “recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
- Deferred revenue: Revenues prepaid by customers for goods or services not yet delivered.
- Cash revenue: For companies operating on a cash basis, cash revenue is recognized when collected.
- Government revenue: Money received by a governmental entity from tax payments (e.g., income tax, sales tax, property tax, excise tax, business tax, etc.), fines, penalties, rental fees, bond sales, intergovernmental transfers and various other sources of revenue.
- Real estate revenue: This is revenue from rents and fees derived from real estate properties.
- Nonprofit organization revenue: This revenue comes from donations, grants, fundraisers, membership fees, event fees and other receipts.
Comparing Revenue to Other Metrics
Revenue, the top-line figure in a company’s income statement (one of the three primary financial statements), is the starting point for several other key terms.
Revenue vs. Earnings
Earnings are what’s left after a company subtracts expenses (such as the cost of goods/services sold and operating expenses) from revenues. Earnings appear near the bottom of an income statement. For example, a company with $1 million in net revenue and $700,000 in expenses has earnings of $300,000.
Revenue vs. Income
Income is a synonym for earnings. It equals revenues minus expenses and includes operating and nonoperating income.
Revenue vs. Profit
Profit is positive earnings, i.e., revenues that exceed expenses. Gross profit equals revenue minus the cost of goods sold (or services delivered). Net profit (also called net income) is total revenue minus total business expenses and is the income statement’s bottom line. Companies add net profit to their retained earnings on their balance sheet at the end of the year.
A net loss is negative earnings, which occurs when expenses exceed revenues.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.