Whether customers pay with cash, check, or credit card, the amount received from selling goods is referred to as revenue in accounting. When a customer pays, the business records revenue if it uses cash accounting. Even if the customer doesn’t pay for another month, you record revenue under accrual accounting as soon as the sale is complete.
Sales and revenue, in accounting, mean the same thing. Even though some people use all three terms interchangeably, they are distinct from income. You might not rely solely on sales revenue to support your lifestyle. As an illustration, if your business makes loans, you receive income from the interest, but it is not sales revenue.
Your sales revenue for the accounting period is listed on the top line of the income statement. The Corporate Finance Institute suggests that you put down that amount if you sold $130,000 worth of goods during the previous quarter. The revenue on the income statement may be either the gross sales or the net sales following the deduction of returns, allowances, and discounts.
Next, you must consider the cost of sales if your company sells goods. Cost of Goods Sold is entered after Sales on the income statement. Say you sold $75,000 worth of inventory to generate the $130,000 in sales revenue; this would leave you with a gross profit of $55,000. By using the cost-of-sales accounting formula, you can avoid adding the individual costs of each sold item.
Because a business cannot exist without sales, revenue from sales is crucial. Accounting Tools claims that it is possible to place too much emphasis on revenue. If new products are released too quickly to increase sales, it will not have any positive effects. The revenue doesn’t significantly increase your bottom line if the cost of the goods is high and there is little profit on the sales.
According to Forbes, one of the benefits of using gross revenue from sales is that it is an easily accessible number that can be calculated without the need for any complicated math to determine profits or net income. However, increasing revenue doesn’t indicate whether you’re improving or growing from month to month because it ignores factors like expenses. It is preferable to use EBITDA, or earnings before interest, taxes, depreciation, and amortization.
Fraser Sherman has written about all facets of business, including how to launch one, how to maintain one, the ideal corporate structure, and the specifics of financial statements. Additionally, he has operated a few small businesses on his own. He resides in Durham, North Carolina, with his wonderful wife and two adorable dogs.
Difference between Sales vs Revenue vs Income
What is sales?
The income a business receives from customers who purchase its goods or services is reflected in its sales. Sales values are a subset of the total revenue that a company generates because, unlike revenue, they only take into account incoming cash flow that is directly related to processing the sale of its goods or services.
Sales figures can be further divided into values for gross sales and net sales because sales are one factor that can contribute to a company’s revenue. Additionally, businesses may include net sales in their income statements in addition to total revenue.
Here are the different categories of sales:
Gross sales
Gross sales represent a company’s total revenue from sales less the cost of goods sold that are directly associated with manufacturing or otherwise supplying its goods and services. Sales are regarded as a subsection of revenue because gross sales can also be used to calculate total revenue. Lets look at an example.
Let’s say a manufacturer of auto parts estimates its annual sales to be $600,000. Assume, furthermore, that the company’s cost of goods sold (COGS) for the same 12-month period was $150,000. The business would use the formula (gross sales) = (total sales) – (COGS) to determine its gross sales.
The company’s gross sales would be $450,000 because gross sales equal ($600,000) – ($150,000). After deducting operating costs and other sales-related expenses from the gross sales, the business can then calculate its net sales.
Net sales
After all costs of goods sold and operating expenses are subtracted, the value of a business’s total sales profit is determined by its net sales. Because it can inform businesses about how profitable and in-demand their goods and services are, this value may be a crucial financial tool for assessing a company’s sales profitability.
Let’s figure out how the same example parts manufacturer will calculate its net sales. The business may deduct operational costs, such as cash outflow from product returns and refunds, rebates, or discounts. In this instance, the business would include the following sum on their balance sheet:
The formula (net sales) = (gross sales) – (expenses) is used to calculate the company’s net sales, which are calculated by adding all costs and cost of goods sold.
The company’s net sales are $360,000 because net sales equal ($450,000) – ($90,000). This value can then be added to the company’s overall revenue.
It’s also crucial to keep in mind that sales profitability, or a company’s gross profit margins, may only provide information about how profitable a company’s goods or services are. On the other hand, total revenue provides data on a company’s overall financial health.
What is revenue?
A company’s total income from sales, incoming assets, or even cashing out on an investment is referred to as revenue. A company’s revenue can be used to account for its sales, but it can also include income from sources other than sales. Similar to tracking sales, revenue can also be tracked as a company’s gross revenue and net revenue.
Here are some of the most common types of revenue:
Gross revenue
Gross revenue is the sum of a company’s sales and non-operational income before any costs are subtracted and deductions are made. Here is an example:
Let’s say Lees Hardware, a retailer of tools and equipment, calculates its total gross revenue for the quarter. All revenue sources from the firm’s overall sales, investments, and any assets or interest accrued for the time period would be combined. Lees Hardwares income statement could look something like this:
So, the companys total revenue is $67,400. After deducting overhead, costs of goods sold, and other expenses, Lees Hardware could further break down this value to determine its net revenue.
Net revenue
Net revenue is a company’s total income after deducting all costs, such as overhead (rent, utilities, or payroll) and costs of goods sold. This includes all of a company’s costs directly associated with its sales operations as well as its obligations for debt repayments, rent or mortgage, utility payments, and other overhead expenses for operating the whole business. Let’s examine how Lees Hardware would determine their net revenue using this example:
Lees Hardware subtracts its expenses from its quarterly gross revenue of $67,400 to arrive at its net revenue. The business’ overhead costs also include rent and utility bills, employee payroll, warehouse storage fees, equipment maintenance, and operational costs like utility bills. Their income statement might look like this:
Therefore, Lees Hardware spent $46,500 in total during the quarter. Lees Hardware’s quarterly net revenue will be $20,900 after deducting this amount from gross revenue.
The value of a company’s sales typically does not take into account non-operational income like collecting on interest or investments, donations, and other incomes which a business might obtain outside of sales, despite the fact that gross and net sales can be calculated similarly.
Non-operational revenue
Non-operating revenue, such as cash gains from investments and interest, liquidated assets, and even royalties and donations, can be included in a company’s total revenue. A company’s non-operational revenue may also include gains from one-time events, such as the reimbursement of court costs and fees. Companies that receive tax refunds on a quarterly or annual basis may also collect government revenue as non-operational income.
Although there are often similarities between sales formulas, calculating gross and net revenue takes into account all incoming and outgoing cash flow and is not just concerned with a company’s sales-related cash flow.
Differences between revenue and sales
The biggest distinction between revenue and sales is that while revenue can represent a company’s entire income, sales only represents a portion of that income. Other significant differences include the potential uses of each income’s financial data, its source, and the ways in which each of these factors may impact a company.
Source of revenue vs. sales
Sales and revenue come from different sources for a company’s income. For instance, a company’s total revenue may include, in addition to sales, income from the sale of liquidated assets, interest or investment income, donations, or royalties. However, the cash flow from sales transactions is typically the only source of income for a company’s sales.
Value of revenue vs. sales
Sales include revenue from customers who make purchases, whereas revenue refers to the total amount of money a business makes over a specific time period. Consequently, revenue is commonly the greater amount. However, if a business’s sales income exceeds its total revenue, it may indicate that it has incurred additional costs or expenses. The disparity between revenue and sales can affect net incomes in different ways.
Applications of revenue vs. sales
The methods used to calculate sales and revenue can also vary slightly. When a business uses revenue calculations, it typically does so to gather crucial data about its overall financial situation, including all sales, non-operational incomes, and operational and non-operational expenses. The sales figures could, however, be used to determine a company’s profit margins and overall sales profitability.
Key financial metrics used by businesses to assess their overall financial standing and profitability include revenue and sales. Businesses can maintain a current view of their overall financial success by understanding how sales income can affect overall revenue.
FAQ
Is revenue known as sales?
Revenue is the money made from regular business operations and is calculated by multiplying the average selling price by the quantity of units sold. The top line (or gross income) figure is what is used to calculate net income after costs are deducted. Revenue is also known as sales on the income statement.
Why is sales higher than revenue?
Sales include revenue from customers who make purchases, whereas revenue refers to the total amount of money a business makes over a specific time period. Consequently, revenue is commonly the greater amount.
Is revenue a sales or income?
The total income a company receives from the sale of goods or services related to its core business is known as revenue. Because it appears at the top of the income statement, revenue, which is also known as gross sales, is frequently referred to as the “top line.” The total earnings or profit of a company is known as income, or net income.
