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

What Is Revenue?

Investopedia / Matthew Collins

What Is Revenue?

Revenue is the money generated from normal business operations, calculated as the average sales price times the number of units sold. It is the top line (or gross income) figure from which costs are subtracted to determine net income. Revenue is also known as sales on the income statement.

Key Takeaways

  • Revenue, often referred to as sales or the top line, is the money received from normal business operations.
  • Operating income is revenue (from the sale of goods or services) less operating expenses.
  • Non-operating income is infrequent or nonrecurring income derived from secondary sources (e.g., lawsuit proceeds).
  • Non-business entities such as governments, nonprofits, or individuals also report revenue, though calculations and sources for each differ.
  • Revenue is only sale proceeds, while income or profit incorporate the expenses to generate revenue and report the net (not gross) earnings.
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What is Revenue?

Understanding Revenue

Revenue is money brought into a company by its business activities. There are different ways to calculate revenue, depending on the accounting method employed. Accrual accounting will include sales made on credit as revenue for goods or services delivered to the customer. Under certain rules, revenue is recognized even if payment has not yet been received.

It is necessary to check the cash flow statement to assess how efficiently a company collects money owed. Cash accounting, on the other hand, will only count sales as revenue when payment is received. Cash paid to a company is known as a "receipt." It is possible to have receipts without revenue. For example, if the customer paid in advance for a service not yet rendered or undelivered goods, this activity leads to a receipt but not revenue.

Revenue is known as the top line because it appears first on a company's income statement. Net income, also known as the bottom line, is revenues minus expenses. There is a profit when revenues exceed expenses.

To increase profit, and hence earnings per share (EPS) for its shareholders, a company increases revenues and/or reduces expenses. Investors often consider a company's revenue and net income separately to determine the health of a business. Net income can grow while revenues remain stagnant because of cost-cutting.

Such a situation does not bode well for a company's long-term growth. When public companies report their quarterly earnings, two figures that receive a lot of attention are revenues and EPS. A company beating or missing analysts' revenue and earnings per share expectations can often move a stock's price.

Revenue may also be referred to as sales and is used in the price-to-sales (P/S) ratio—an alternative to the price-to-earnings (P/E) ratio that uses revenue in the denominator.

Types of Revenue

A company's revenue may be subdivided according to the divisions that generate it. For example, Toyota Motor Corporation may classify revenue across each type of vehicle. Alternatively, it can choose to group revenue by car type (i.e. compact vs. truck).

A company may also distinguish revenue between tangible and intangible product lines. For example, Apple products include iPad, Apple Watch, and Apple TV. Alternatively, Apple may be interested in separately analyzing its Apple Music, Apple TV+, or iCloud services.

Revenue can be divided into operating revenue—sales from a company's core business—and non-operating revenue which is derived from secondary sources. As these non-operating revenue sources are often unpredictable or nonrecurring, they can be referred to as one-time events or gains. For example, proceeds from the sale of an asset, a windfall from investments, or money awarded through litigation are non-operating revenue.

Formula and Calculation of Revenue

The formula and calculation of revenue will vary across companies, industries, and sectors. A service company will have a different formula than a retailer, while a company that does not accept returns may have different calculations than companies with return periods. Broadly speaking, the formula to calculate net revenue is:

Net Revenue = (Quantity Sold * Unit Price) - Discounts - Allowances - Returns

The main component of revenue is the quantity sold multiplied by the price. For a service company, this is the number of service hours multiplied by the billable service rate. For a retailer, this is the number of goods sold multiplied by the sales price.

The obvious constraint with this formula is a company that has a diversified product line. For example, Apple can sell a MacBook, iPhone, and iPad, each for a different price. Therefore, the net revenue formula should be calculated for each product or service, then added together to get a company's total revenue.

There are several components that reduce revenue reported on a company's financial statements in accordance to accounting guidelines. Discounts on the price offered, allowances awarded to customers, or product returns are subtracted from the total amount collected. Note that some components (i.e. discounts) should only be subtracted if the unit price used in the earlier part of the formula is at market (not discount) price.

One entity's revenue is often another entity's expense. For example, your personal household expense of $1,000 to buy the latest smartphone is $1,000 revenue for the phone company.

Example of Revenue

Microsoft boasts a diversified product line that contributes many types of revenue. The company defines its business in several different channels including:

  • Productivity and Business Processes: Office products (commercial and consumer), LinkedIn, Dynamics products
  • Intelligent Cloud: Server products and cloud services
  • More Personal Computing: WIndows OEM, Windows Commercial, Xbox, Surface.

As shown below, Microsoft reported $49.36 billion during Q3 2022. High-level reporting requirements have Microsoft's income statement being shown between product revenue and service/other revenue.

Microsoft, Q3 2022 Income Statement
Microsoft, Q3 2022 Income Statement.

In supplementary reports, Microsoft further clarifies revenue sources. For example, the breakdown of the $49.36 billion of revenue earned during Q3 2022 was split fairly evenly between the three product lines:

Microsoft, Segment Revenue Q3 2022
Microsoft, Segment Revenue Q3 2022.

Revenue vs. Income/Profit

Many entities may report both revenue and income/profit. These two terms are used to report different accumulations of numbers.

Revenue is often the gross proceeds collected by an entity. It is the measurement of only income component of an entity's operations. For a business, revenue is all of the money it has earned.

Income/profit usually incorporates other facets of a business. For example, net income or incorporate expenses such as cost of goods sold, operating expenses, taxes, and interest expenses. While revenue is a gross amount focused just on the collection of proceeds, income or profit incorporate other aspects of a business that reports the net proceeds.

Special Considerations

Recognizing Revenue: ASC 606

In 2016, the Financial Accounting Standards Board released Revenue from Contracts with Customers (Topic 606). The accounting standards update outlined new guidance on how companies must report revenue. The guidance requires an entity recognize revenue in accordance with five steps:

  1. Identify the contract with the customer.
  2. Identify the performance obligation in the contract.
  3. Determine the contract price.
  4. Allocate the transaction price to the performance obligation(s) in the contract.
  5. Recognize revenue when the entity satisfies a performance obligation.

Government Revenue

In the case of government, revenue is the money received from taxation, fees, fines, inter-governmental grants or transfers, securities sales, mineral or resource rights, as well as any sales made. Governments collect revenue from citizens within its district and collections from other government entities.

Nonprofit Revenue

For nonprofits, revenues are its gross receipts. Its components include donations from individuals, foundations, and companies, grants from government entities, investments, and/or membership fees. Nonprofit revenue may be earned via fundraising events or unsolicited donations.

Real Estate Revenue

In terms of real estate investments, revenue refers to the income generated by a property, such as rent or parking fees or rent. When the operating expenses incurred in running the property are subtracted from property income, the resulting value is net operating income (NOI). Vacant real estate technically does not earn any operating revenue, though the owner of the property may be required to report fair market value adjustments that result in gains when externally reporting their finances.

What Does Revenue in Business Mean?

Revenue is the money earned by a company obtained primarily from the sale of its products or services to customers. There are specific accounting rules that dictate when, how, and why a company recognizes revenue. For instance, a company may receive cash from a client. However, a company may not be able to recognize revenue until they've performed their part of the contractual obligation.

Are Revenue and Cash Flow the Same Thing?

No. Revenue is the money a company earns from the sale of its products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of the effectiveness of a company's sales and marketing, whereas cash flow is more of a liquidity indicator.  Both revenue and cash flow should be analyzed together for a comprehensive review of a company's financial health.

What Is the Difference Between Revenue and Income?

Revenue and income are sometimes used interchangeably. However, these two terms do usually mean different things. Revenue is often used to measure the total amount of sales a company from its goods and services. Income is often used to incorporate expenses and report the net proceeds a company has earned.

How Does One Generate and Calculate Revenue?

For many companies, revenues are generated from the sales of products or services. For this reason, revenue is sometimes known as gross sales. Revenue can also be earned via other sources. Inventors or entertainers may receive revenue from licensing, patents, or royalties. Real estate investors might earn revenue from rental income.

Revenue for federal and local governments would likely be in the form of tax receipts from property or income taxes. Governments might also earn revenue from the sale of an asset or interest income from a bond. Charities and non-profit organizations usually receive income from donations and grants. Universities could earn revenue from charging tuition but also from investment gains on their endowment fund.

What Is Accrued and Deferred Revenue?

Accrued revenue is the revenue earned by a company for the delivery of goods or services that have yet to be paid by the customer. In accrual accounting, revenue is reported at the time a sales transaction takes place and may not necessarily represent cash in hand.

Deferred, or unearned revenue can be thought of as the opposite of accrued revenue, in that unearned revenue accounts for money prepaid by a customer for goods or services that have yet to be delivered. If a company has received prepayment for its goods, it would recognize the revenue as unearned, but would not recognize the revenue on its income statement until the period for which the goods or services were delivered.

Article Sources
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  1. Microsoft. "Earnings Release FY22 Q3."

  2. Financial Accounting Standards Board. "Revenue from Contracts with Customers."