Types of revenue
Here are the different types of revenue:
Operating revenue is money made from a business’s primary source of income. Operating revenue is generated by a company’s regular, core functions, typically the sale of its goods or services. For instance, the sale of clothing provides the operating income for a clothing store. A hairstylists operating revenue comes from their services rendered.
Businesses may receive income from sources other than sales in addition to sales revenue. This is shown on financial statements as “other revenue” and includes things like:
In order to provide a more accurate picture of business success, this type of revenue is reported separately from sales revenue. Non-operating revenue incorporates any irregular or one-time transactions. It’s important to distinguish between the two sources of income, such as if your company’s sales this year are significantly lower than they were last year but it makes a significant profit from the sale of an empty storage facility.
What is revenue?
A company’s revenue is the sum of money it earns from all of its income-producing endeavors. It includes sales income but encompasses more than just sales. Selling goods or services, making other types of sales, and conducting sporadic or irregular transactions can all result in revenue. It is a crucial sign of a business’ success, and tracking changes in revenue can assist stakeholders in making plans for the future and the present. For example, companies may analyze revenue data to help:
Businesses can also use revenue to compare various sales strategies over time. For instance, retail stores might experiment with one merchandising strategy for the first six months and a different one for the following six months. Then, they would compare the revenue from the two periods to see which strategy generated the most money.
Some businesses may find it useful to monitor revenue in various accounts to obtain even more detailed information. Take into account allocating revenue among various departments, groups, locations, product or service lines, or payment methods. Additionally, you can maintain a contra revenue account to track sales discounts, returns, and allowances. Contra accounts accrue debits as opposed to traditional revenue accounts’ credits. Another way to guarantee accuracy in accounting and financial analysis is by using these types of accounts.
What is recognized vs. deferred revenue?
During a sales transaction, recognized revenue is recorded in the accounting records. When payment is received in exchange for goods or services, the transaction is completed and recorded. For instance, in the majority of retail transactions, the customer must pay for the item.
Deferred revenue, also known as unearned revenue, is money received prior to the delivery of goods or services. Customers make payments now or over a long period of time for goods or services. For instance, because customers frequently pay in advance for a year or longer, many subscription services generate deferred revenue. Deferred revenue is reported on income statements as a liability because in these situations, customers are still owed for goods and services. Businesses can modify the amount of deferred revenue remaining on advance payments with each reporting period.
The cable company provided three months of service and still “owes” nine months of service, so if a customer paid $240 for a year’s worth of cable services, the deferred revenue after three months was $180. The company owes six months of service, so the deferred revenue after six months is $120.
How to find gross revenue
Gross revenue, also known as sales revenue, is the total amount of money earned from a sale. This amount does not take into account any discounts or other costs related to making or selling a product. Product-based businesses multiply the total number of products sold by the price per unit to arrive at their gross revenue. Here are the methods for finding gross revenue:
The steps to calculate gross revenue for businesses that sell products are as follows:
Gross revenue = total units sold x price per unit
Consider Pops Tops, a store that sells hats, which charges $20 for one. The gross revenue for one hat is $20. You can determine the gross revenue if Pops Tops sold 40,000 hats in a year by using the formula below:
Gross revenue = 40,000 x $20 = $800,000
The steps to determine gross revenue for service-based businesses are as follows:
Customer volume times average service price equals gross revenue.
Take Go Green, a landscaping business that attends to 3,000 yards annually, as an example. The company charges an average of $150 per yard.
Gross revenue = 3,000 x $150 = $450,000
How to find net revenue
Net revenue is the income from sales of goods or services less the costs incurred by the business to produce and market those goods. Net revenue accounts for costs related to:
Here are two approaches to calculating net revenue, each with an illustration:
How to find net revenue for product-based businesses
The steps to calculate net revenue for businesses that sell products are as follows:
Heres an example using this method:
Returning Pops Tops, the net profit from each hat is $16 if they spend $4 to make each $20 hat. The company spends $160,000 to produce the 40,000 hats that are sold in a year (40,000 x $4). Net revenue can be determined as follows:
Net revenue is calculated as (number of products sold x price per product) – product manufacturing costs.
Net income for the year equals (40,000 x $20) – $160,000, or $640,000.
You can determine net revenue for a hat if Pops Tops sells it for 50% less by taking into account the discounted sales price in addition to the hat’s manufacturing costs.
Net revenue = ($20 x 0. 5) – $4 = $6 per hat.
How to calculate net revenue for service-based businesses
Similar to product-based businesses, service-based businesses follow the same procedures for calculating net revenue. For the purpose of calculating net revenue, service-based businesses also deduct the costs necessary to provide their services:
An illustration of how to determine net revenue for service-based businesses is provided below:
In order to calculate net revenue, Go Green, the landscaping business from the prior example, can deduct expenses from its gross revenue. The $70,000 in expenses for the year could be used for equipment, fuel, and employee wages.
Net revenue is calculated as (number of customers x average service price) – service-related expenses.
(3,000 x $150) – $70,000 = $380,000
What is the formula for revenue and profit?
It’s simple to use the formula for a profit calculator: profit = revenue minus costs.