What Is Revenue

What Is Revenue?
Definition,
Types, Examples and More
Updated 11 March 2024
If you are interested in

working in accounting or
finance, it is helpful to know
the common term 'revenue'.
Learning what revenue means
can help you determine your
company's financial health.
Understanding the types of
revenue can also help you
guide your company in
making strategic financial
decisions. In this article, we
explain what is revenue,
examine its importance, list
the different types of revenue
and review five revenue
recognition methods.
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What is revenue?
Revenue is the income a
business earns by selling
goods or services to a
customer. It is typically a
key indicator of a company's
financial health. A
company's revenue may
include:
Sales of goods or services
Interest
Dividends
Rental income
Evaluating your company's
revenue can help you
determine how well the
business is performing
compared to previous years.
Revenue can also assist your
company in recognising which
products or services
customers prefer. This can
improve the company's
product development
process, which may further
increase the revenue it earns.
Why is understanding revenue
important?
If you work in finance or
accounting, it is helpful to
understand revenue in order
to accomplish tasks at work
accurately. Some
professionals analyse
revenue data to develop
pricing strategies, create
short-term and long-term
financial goals and
establish a budget for a
project. They may also refer
to that data when preparing
income statements. For
example, if you are an
accountant, you may record
your company's revenue on
the first line of an income
statement for a particular
period. Learning about your
company's revenue can also
help you predict its growth
potential, which may affect
your career goals.
Related: What Does A
Revenue Manager Do: A
Complete Guide
Revenue vs. profit
There are three key differences
between revenue and profit:
What each value means:
revenue refers to the income a
company earns by providing
services or selling products
in a given financial year. In
comparison, profit refers to
the amount realised by a
company after subtracting
the expenses it incurred when
providing a service or goods
from the total revenue.
Where each value appears on
an income statement: revenue
typically appears on the first
line of an income statement.
In contrast, profit usually
appears on the bottom line
of an income statement.
How companies refer to each
term: some companies use the
term 'net income' rather than
'profit'. When referring to
revenue, some companies use
the term 'sales'.
Related: Gross Income:
What It Is and How To
Calculate It per Month
2 types of revenue
Here are the two main types
of revenue:
Operating revenue
Operating revenue is the
income a company earns by
conducting its core business
operations. It is typically a
company's largest source of
income. For example, a
hospital might earn its
operating revenue by
providing medical services,
while a retail store could
produce its operating revenue
by selling merchandise.
Depending on the business
and industry, a company's
operating revenue may
include various elements.
Some examples of operating
revenue are:
Sales revenue: a sale occurs
when there is an exchange of
goods for currency. For
example, a fashion company
that sells clothing could
record clothing sales as
revenue.
Service revenue: service
revenue occurs when a
company or consultant
provides professional
services to a client. For
example, a marketing firm
may record the revenue it
earns from providing
marketing services to its
clients.
Nonoperating revenue
Nonoperating revenue is the
income a company earns by
conducting business outside
of its core business
operations. Some examples
of nonoperating revenue are:
Rent revenue: rent revenue is
the income a company earns
from allowing third parties
to rent buildings or
equipment.
Interest revenue: this is the
income a company earns
from an investment. Interest
revenue can also include the
interest accrued from
accounts receivable.
Examples of revenue
Here are some examples of
revenue that a company may
earn:
Gross revenue
Gross revenue, or gross sales,
is the total income your
company earns during a
particular accounting period,
without prior deductions. It
can show a company's ability
to sell its goods and services
effectively. Gross revenue
typically appears on the top
line of an income statement.
To calculate gross revenue,
you can use this formula:
Revenue = price of goods or
services × number of units
sold or number of customers
For example, if a company
sells 10 computers at
₹50,000 each, it could use
this formula to calculate its
gross revenue:
Gross revenue = ₹50,000 × 10
= ₹500,000
Related: What Is The
Average Revenue Formula?
(And How To Calculate)
Net revenue
Net revenue, or net sales,
refers to the value of a
company's revenue after
subtracting discounts, item
returns and business costs
such as commissions.
To calculate net revenue, you
can use this formula:
Net revenue = gross revenue -
commissions - discounts -
returns
For example, if a company
earns a gross revenue of
₹500,000 for selling 10
computers, offers its sales
representatives a total of
₹50,000 in commissions,
provides its customers with a
discount of ₹10,000 on each
computer and receives no
returned items, it might use
the following formula:
Net revenue = ₹500,000 –
₹50,000 – (₹10,000 × 10
computers) − ₹0 in returns =
₹350,000
Accountants use both gross
and net revenue to summarise
their company's financial
health and evaluate the
performance of the company
in terms of profit and
expenses.
Deferred revenue
Deferred revenue, or unearned
revenue, is the income a
company earns before
providing services or goods
to a customer. It is an
advance payment the
company receives for
products or services that it
plans to deliver in the future.
As your company delivers
goods or services, a portion
of its deferred revenue
becomes its earned revenue.
Accrued revenue
Accrued revenue is the
revenue a company earns for
delivering goods or services
that a customer has not paid
for yet. It is the revenue that
a business recognises but has
not yet realised. Accrued
revenue is significant because
it can help accountants
understand their company's
long-term financial
performance and review how
sales contribute to the
company's profitability and
long-term growth.
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5 revenue recognition
methods in accounting
Revenue recognition is an
important accounting
principle that outlines
specific conditions under
which a company recognises
different types of revenue
and determines how to
represent the revenue in
financial statements. The
method your company
chooses depends upon the
industry in which you operate
and business circumstances.
The five revenue recognition
methods are:
Cost recovery method
In the cost recovery method,
a business recognises a profit
related to a sale after a
customer pays for the goods
or services sold. Your
company may use this
approach to clarify its total
expenses for completing a
project related to the good or
service sold, such as product
development. The company
can then use this information
to develop accurate budgets
for similar projects in the
future.
Related: 9 Commonly
Accepted Accounting
Principles
Instalment method
If your company gives
customers the option to pay
for a product over multiple
years, it may use the
instalment method of
revenue recognition.
Companies that sell high-
cost goods or services often
use this method. A company
may also use this method to
expand its audience by
providing customers with a
cost-effective way to purchase
a product.
Sales-basis method
A company may use the
sales-basis method if its
customers make a purchase
and it delivers the goods or
services its customers bought.
Companies that apply the
sales-basis method typically
transfer the ownership of a
product to the customer at
the time of sale. The retail
industry widely uses the
sales-basis method of
revenue recognition.
Percentage of completion
method
Companies use the
percentage of completion
method when a project lasts
several years. Companies
that build aeroplanes, ships
or bridges may take more
than a year to deliver the
final product. During that
time, a company can show its
shareholders that it is
generating revenue and
profits before completing the
project. By using the
percentage of completion
method, your company can
report profit or loss related
to a project in every financial
year in which the project is
active.
Completed contract method
A company that uses the
completed contract method
often recognises the revenue it
has earned from a project
after the project is finished.
If your company uses this
method, it may create a
contract and ask a client to
agree to specific terms to
determine when work on the
project is complete. Usually,
the construction industry or
other industries that involve
project-based contracts use
the completed contract
method.

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