What is Revenue? Definition, Formula, Calculation, and Example

Let's try to understand revenue with a very simple example first. Suppose a seller sells ten pens for Rs. 10 each. The total money the seller will get by selling the pens will be called revenue. It should be noted that revenue is not profit but the amount received from the product's sale. If the seller purchased these ten pens for Rs. 90, then the total profit is equal to Rs.10.

Therefore, it can be derived from the above information that total revenue is the total amount received from the sale of products.

Average Revenue

Average revenue is equal to the amount received from selling one unit of the product among the bunch of products. Therefore, it can be said that average revenue equals the price of a single unit of product.

Therefore,

TR= Q x AR

Here,

TR stands for Total Revenue,

Q stands for the total number of products sold and,

AR stands for Average Revenue.

Furthermore, net income generated from the sale of products is calculated by subtracting the cost incurred in manufacturing the products or all expenses from the total revenue.

Net Income = Total Revenues - Total Expenses

Any amount that is generated in the course of normal business operations is also known as revenue.

Understanding Revenue

The money which is brought into a company by its business operations is called revenue. There are different methods through which revenue can be calculated.

In accrual accounting, the sale of goods or services to customers, which is done on credit, is also included as revenue of the seller or the company concerned. According to some rules, even if the customer has not paid the amount for goods or services he has received, that amount will still be recognized as revenue.

However, in the case of cash accounting, only when the seller has received cash for the goods or services provided to the customers, only then the revenue considered. As revenue is what appears first in the income statement of a company; therefore, it is also known as the top line. The bottom line is a company's net income, which is calculated by subtracting all the expenses from the revenue.

It is said that the business has earned profit when the revenue is more than the expenses incurred. And therefore, businesses often try to minimize expenses so that the profit can be increased, which could benefit the business's shareholders.

Investors also analyze the status of a business by the revenue generated by the business and the net income of the business. Businesses can increase their net income by keeping the revenue constant, and it can be done by minimizing the expenses and cost-cutting in manufacturing the products. But, it should be noted that such kind of practices is not good for businesses in the long term.

Whenever a public company reports its quarterly earnings, its revenue and earnings per share (EPS) become the centre of attraction.

Types of Revenue

Revenue can be divided by companies in terms of different divisions, whatever suits their needs and strategies. For example, Toyota motors can make the division or category of different types of vehicles and may calculate the revenue for each category of vehicles separately. It can also divide revenue based on the specific type of vehicles, for example, a group of cars vs a group of trucks, etc.

A company's revenue can also be subdivided into tangible and intangible product lines. For example, Apple Company may divide their products' revenue for individual products like the iPad, Apple Watch, etc. Additionally, Apple may also separate revenue based on its software like Apple Music or Apple TV+.

Revenue can be further divided into operating revenue and non-operating revenue. Operating revenue is the income generated from the company's core business sales, and non-operating revenue is the income generated from the company's secondary sources. Non-operating income is not fixed and may vary because of different factors; therefore, they are unpredictable because of their no-recurring nature and are known as one-time events or gains.

Some examples of non-operating income are proceeds from the sale of an asset, money awarded by any litigation, or a windfall from investments.

Formula and Calculation of Revenue

The formula for calculating revenue may vary for different sectors. For example, a service company's formula may differ from that of a retailer in calculating revenue. Also, companies with return options may use different formulas, whereas companies not accepting returns may use different formulas.

The general formula which can be used to calculate net revenue is given below:

Net revenue = (Quantity Sold x Unit Price) - Discounts - Allowances - Returns

The main component of revenue is equal to the total quantity sold multiplied by the price of each unit.

The revenue of a service company can be calculated by multiplying service hours with the billable service rate. At the same time, a seller can calculate the revenue by multiplying the total number of units sold by the sales price per unit. But for those companies that sell different products at different prices, the revenue is usually calculated for each product separately, similar to what we did before. After calculating the revenue generated from each product, all the revenue for each variety of products is added to get the company's total revenue.

For example, Apple may sell its iPhone, iPad, or MacBook at different prices; then, in such a case, to get the total revenue of Apple, we will need to calculate the revenue for each variety of products sold and then add all to get the total revenue.

According to accounting guidelines, the revenue reported on a company's financial statements may be reduced because of several components. Also, suppose the company is offering any discount on products or any customer allowances available, then in such a case, all these discounts and allowances are subtracted from the total revenue collected.

It should be noted that only discounts are subtracted from the total revenue while calculating a company's total revenue, depending on the market price of the product on which the discount offered was used.

Revenue vs Income/Profit

The entities often mention revenue and income/profit in their financial statements. But it should be noted that these two are very different from each other.

Revenue includes all the earnings made by the company and does not include or exclude any other component. It is only the earnings that the operations of any business have generated.

In contrast, Income/profit also includes many other factors. The income/profit of a company excludes all the expenses which have occurred during the operations of the business or the sale of products of the business. It also excludes the interest and taxes which the business entity has paid.

Special Considerations

Recognizing Revenue: ASC 606

The Financial Accounting standard board updated new guidelines on how companies reported revenues back in 2016.

The five steps which an entity should recognize while reporting revenue according to the new guidelines are given below:

1. Identification of the contract with customers by the company
2. Identification of the performance obligations which are mentioned in the contract
3. Determination of the contract price
4. Allocation of the transaction price in the section of performance obligation in the contract
5. Revenue is recognized only when the entity's performance obligations are met.

Government Revenue

Not only private business entities but also the government makes revenue by using various methods. And they collect the revenue from the public only. The government's revenue mainly comes from the taxes they receive from the public, fines, fees, or any sales made.

Revenue is collected by the government from the districts of the country; it includes the revenue collected by various government entities.

Nonprofit Revenue

Non-profits are the revenue that is collected or received through donations from individuals, companies, or even the government. It can also be in government funds or grants from government entities. It can also be earned by organizing fundraising events or unsolicited donations.

Real Estate Revenues

Real Estate revenues are the income generated from a property that you own. This income can be in the form of rent, parking fees, etc. It should be noted that the revenue generated differs from the property's net operating income. The net operating income of the property is calculated by subtracting all the operating expenses incurred in the maintenance of the property from the total income the property has generated.

If the property or the real estate is vacant and is not in use to generate any kind of income, then in such a case, the revenue generated from the property will be zero.

Frequently Asked Questions

What is the meaning of revenue in terms of business?

For a business, revenue is what it earns from the sales of the products or services it provides to its customers. There are many other accounting rules available using which a company or a business calculates its revenue.

For example, suppose a company enters into a contract with a customer that they will provide their services to him in exchange for some charges. In such a situation, consider the customer has paid his fee to the company for the services, but the company has not yet provided the service or has not performed its obligations as per the contract. Therefore, the fees paid by the client cannot be included in the company's revenue until the company fulfils its obligations listed in the contract.

Are Revenue and Cash Flow the same thing?

Definitely not; there is a big difference between these two. Revenue is what the company collects after selling its products or services to customers, whereas cash flow refers to the amount of cash coming in and going out during the transactions carried out by the company.

Cash flow can be seen as a liquidity indicator, whereas the revenue of a company shows how effective the sales and marketing of the company are.

What is the main difference between Revenue and Income?

As we discussed earlier, revenue is the total income that a business has generated by selling its products or services. It does not include any kind of expenses incurred. At the same time, a business's income is calculated after subtracting all the operating expenses, taxes, and interests that a company has incurred to sell its products from the total revenue.

How is revenue generated and calculated in a different scenario?

In the case of a company or a business, revenue is generated by the sales of products or services, also known as gross sales. However, there can be many other sources through which revenue can be generated.

For example, an inventor can generate revenue from the patent he receives for any invention he makes. An entertainer can generate revenue by showing his work or talent, while a real estate investor can generate revenue from the rent he receives by renting out a property. Government generates revenue by imposing different types of taxes, fines, and fees or through any sales made. The government often sells some assets to generate revenue.

Organizations like Non-profit organizations may earn or generate income through donations from any individual, organizations, and even from the government in some cases. University's income is generated by the education fees they charge to students.

What is the difference between Accrued and Deferred Revenue?

When a company delivers goods or services to customers, but the customer has not yet paid the charges for the goods or services, it is called accrued revenue.

Besides, when the customer has already paid for the goods or services yet to be delivered to him, then in such cases, revenue earned by the business is called deferred revenue.