Definition of Revenue
Revenue is the amount a company receives from selling goods and/or providing services to its customers and clients. A company’s revenue, which is reported on the first line of its income statement, is often described as sales or service revenues. Hence, revenue is the amount earned from customers and clients before subtracting the company’s expenses.
Revenue vs Net Income
While revenue is the top line on a company’s income statement, net income is often referred to as the bottom line.
The difference between the amount of revenue and the amount of net income is significant. Here are some hypothetical amounts to illustrate the point:
- Revenue from sales of products $300,000
- Cost of the products that were sold $200,000
- Expenses (wages, rent, ads, etc.) $88,000
- Net income (before tax) $12,000
Using the above amounts we see that the company’s net income was only 4% of its revenue ($12,000/$300,000).
Calculating Revenue
The best way to calculate a company’s revenue during an accounting period (year, month, etc.) is to sum up the amounts earned (as opposed to the amounts of cash that were received). For example, if a new company sold $75,000 of goods in December but allows the customer to pay 30 days later, the company’s December sales are $75,000 (even though no cash was received in December). Reporting revenues in the period in which they are earned is known as the accrual basis of accounting. Hence, a company’s revenue could occur before the cash is received, after the cash is received, or at time that the cash is received.
(Note that for income tax reporting, smaller companies may use the cash basis of accounting.)
Examples of Revenue
Common examples of revenue include:
- A retailer’s sales of merchandise, sales of extended warranties, and repair revenues
- The fees earned by a law firm for legal services provided to clients
- The amounts earned by publishers of magazines, newspapers, and electronic information
Revenue vs Income
It is important to note that many people use the term income to mean revenue. Perhaps a business owner sees money “coming in” from customers and logically refers to it as “income”. However, it is best to use the word sales or revenue when referring to the amounts earned from customers, and to use the word income for an amount that reflects the subtraction of expenses.
