Gross Revenue vs. Net Revenue Reporting: An Overview
Recognizing and reporting revenue are critical and complex problems for accountants. Many investors also report their income, and the difference between net and gross revenue for a small business can have significant income tax repercussions if handled incorrectly. There are many gray areas in both recognition and reporting, but, ultimately, all earned income from sales transactions falls into gross or net categories.
- Recognizing and reporting revenue are critical and complex problems for accountants.
- The way that revenue is recorded and reported is also important for investors and financial analysts.
- When gross revenue is recorded, all income from a sale is accounted for on the income statement. There is no consideration for any expenditures from any source.
- Net revenue reporting is instead calculated by subtracting the cost of goods sold from gross revenue and provides a truer picture of the bottom line.
Gross Revenue Reporting
When gross revenue (or gross sales) is recorded, all income from a sale is accounted for on the income statement. There is no consideration for any expenditures from any source.
Gross revenue reporting separates the sales and cost of goods sold (COGS). For example, if a shoemaker sold a pair of shoes for $100, the gross revenue would be $100, even though the shoes cost $40 to make. Standard gross versus net revenue reporting guidelines under generally accepted accounting principles (GAAP) were addressed by the Emerging Issues Task Force, or EITF 99-19.
Net Revenue Reporting
Net revenue (or net sales) reporting only lists what's left on the "bottom line", calculated by subtracting the cost of goods sold from gross revenue. For the same shoemaker, the net revenue for the $100 pair of shoes he sold, which cost $40 to make, would be $60. From that $60, he would deduct any other costs such as rent, wages for other staff, packaging, and so on. Anything that comes as a cost to the shoemaker would be deducted from the gross revenue of $100, resulting in the net revenue.
Net revenue is usually reported when there is a commission that needs to be recognized and/or when a supplier receives some of the sales revenue. A classic example is that of legal fees, where an attorney will almost always take a percentage of the net proceeds of litigation. This guarantees they receive a higher settlement amount since the percentage is taken from a larger initial number.
In an accounting terminology, an obligor is a company or individual who is responsible for the provision of a saleable product or service. The designation of a primary obligor is crucial to revenue reporting.
For example, assume that Company A manufactures wrenches. It controls the production costs, assumes the inventory and the credit risk in its operations, and can choose its suppliers and set prices. Given these variables, Company A is clearly the primary obligor and reports any income from the sales of its wrenches as gross.
Company B is an internet store that presents different suppliers' goods to potential customers, and the Company B website has a disclaimer that it is not responsible for the shipping or quality of the products received by customers. In this case, Company B is not the primary obligor and likely reports any revenue as net.
Investors and traders will use their net revenue to calculate their capital gains tax liability for the year; it is usually as simple as subtracting the yearly loss from gains and being taxed on the remainder.