Revenue

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 accounting 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 sales represent a positive cash flow.

• 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 expense. Net income, 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 share (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 operation.
• Secondary Source: Firms undertake many alternative activities—renting, lease, royalty fees, interests, dividends, 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 taxes 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 bonds and securities to the public.

It is subdivided into two types.

1. Operating Revenue: It is the income generated from core business activities—the sale of goods or services rendered.
2. 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 income.

In addition, based on the payment of a transaction, total earnings are categorized as follows:

1. 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 income.
2. 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 payment).

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

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:

1. First, the company needs to calculate the number of units sold or the number of customers served during a certain period.
2. Then, calculate the average unit price.
3. Finally, find the product of the average unit price and the number of units sold/number of customers served.
4. 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.

Example #1

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.

Solution:

The gross sale of A Ltd. is $394000000.

Example #2

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.

Solution:

Revenue = Average Unit Price × Number of Customers Served

               = $5 X 300000

               = $1500000

Total earnings of B Communications Ltd. are $1500000.

Example #3

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.

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 –

• Revenue Run Rate
• Delveraging
• Meaning of Revenue Streams
• Cost of Revenue