What is Revenue?

What is Revenue? | Accounting Smarts
Charles Hall

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Charles Hall

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June 10, 2022

There are several financial concepts that you have to understand to accurately evaluate your business's financial health - revenue is one of the main ones.

There are several financial concepts that you have to understand to accurately evaluate your business's financial health - revenue is one of the main ones.

Luckily, revenue is also one of the easiest concepts to understand. 

Revenue refers to the income that a company makes by selling its goods or services during a certain time period. Revenue is calculated by multiplying the number of units sold by the sales price. Alternatively, you can add up all of the income made from selling a service. 

If you're not 100% confident that you know what revenue is and the effect that it has on your business's profitability, that's okay. In this article, we will go over a simplified definition of revenue, how to keep records of revenue, and more. If you're interested in learning more, then keep on reading!

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A Simple Definition of Revenue

Every small business owner knows that the purpose of running a business is to make money. The money is generated by completing certain activities for some businesses that require manufacturing a product. For another, this may be performing a service for clients. 

Revenue is synonymous with sales. When a company sells a product or service, the sale amount is considered revenue. What many don't know is that there are different types of revenue. 

Types of Revenue

There are two main types of revenue that you'll deal with in your business, and they are: 

  • Operating revenue - This type of revenue comes from primary business operations. For instance, if you own a company that manufactures and sells office chairs, your operating revenue will come from chair sales. If you run a consulting business, your operating revenue is the income that the business receives from the sale of your services.
  • Non-operating revenue - This type of revenue is money earned from activities that are not related to primary business operations. This type of income may encompass dividend income and investment income. If your small business does not generate this type of revenue, then you won't have to concern yourself with it. 

Non-operating revenue is inconsistent at best, so it is not a good gauge of how well a company is doing. Instead, look to your operating revenue, as this income is directly dependent on your business's main activities. 

Sources of Revenue

To make the concept of revenue a bit clearer, let's go over a few examples. The following list will go over some common revenue examples: 

  • Sales - The amount of money that you make from sales constitutes how much revenue you made. The sale of a toy or service fits into this category. This is operating revenue. 
  • Interest Revenue - If your small business uses a bank account, any interests that the company gains through that account will count as non-operating revenue. 
  • Dividend Revenue - If one company invests in another, any income from dividends will count as non-operating revenue. 

These are not the only sources of revenue that companies earn. Sometimes you will have to classify revenue that does not fit into any of the above categories. In which case, you can create a new account to record that revenue. 

How to Record Revenue

Now that you know what revenue is and you've reviewed some revenue examples, it's time to talk about how to record revenue in your financial books. It's important to know how to record revenue because revenue should be recorded every time you generate a sale. In this section, we will go over how to correctly record revenue. 

The way that you'll record revenue will depend on which accounting method you prefer. 

If you have a designated accountant who keeps financial books, you can find the company's revenue at the top of the income statement. But if you don't, you can record these transactions yourself. 

Cash Basis Accounting

In cash basis accounting, you would record revenue whenever cash is received from a customer for goods and services. This is the most straightforward way to account for revenue. 

When you record revenue using the cash-basis method, you would debit "cash" for the revenue and then credit "revenue" for that same amount. 

Accrual Basis Accounting

In accrual basis accounting, you would record revenue whenever the service is provided to the customer or the product is delivered to the customer. If you use this type of accounting, you'll record the revenue with the expectation that it will be received at some point in the future.  

When you record sales revenue using the accrual method, you would record a debit to the "accounts receivable" account and then record a credit to "revenue" for that same amount. 

Revenue Scenarios

If you are still a bit lost on how to record revenue transactions, then this section will help to clarify things a bit further. 

Imagine a scenario where you sold a product for $100, and the customer paid it immediately. 

Using cash-basis accounting, you would record $100 as a debit to your "cash" account and then another $100 as a credit to your "revenue" account for $100. 

Imagine a different scenario, where you sold a product that's worth $100, and the customer has not yet paid. 

Using accrual accounting for this transaction, you would need to record $100 as a debit to "accounts receivable" and then another $100 as a credit to the "revenue" account. 

Calculating Revenue and Profit

Calculating revenue is one of the most basic calculations in accounting. Essentially, all that you need to do is find out how much you made from business operations. The following list will show you some methods that you can use to calculate revenue.

  • Fixed-price product. To find out how much revenue you made selling a product that has a fixed price, you would simply multiply the price of the item by the number of products sold. The equation would look like this: Revenue = Item price x number of units.
  • Services. If you sell a service, simply add up all of the money you earned by providing that service. Alternatively, you can take the number of customers and multiply it by the average price of your services. Of course, the latter method will not give you an accurate revenue result. 

To keep good track of your revenue, every sale must be accounted for. The best way to keep track of your sales is to use sales receipts. That way, there will be a physical record of each transaction. 

Net Revenue

If you provide discounts to customers, you should factor that into the price of the item. For instance, if the sales price of a doll is $4, and a discount of $1 was applied, then the price that should be used in your revenue calculation should be $3. This is a very small-scale example. The net revenue can be calculated on a large scale. See below for the equation. 

To calculate net revenue, you should use the following equation: Net revenue = Gross revenue (revenue before discounts and refunds) - Discounts and Refunds. 

It's important to use the net revenue to get the most accurate look at your company's financial condition. If you consider revenue without subtracting refunds and discounts, your revenue will be inflated. 

How Does Revenue Affect Profit?

Revenue has a direct effect on the company's overall profit. Profit, by definition, is the company's revenue minus expenses. If revenue is miscalculated, you could end up with an incorrect profit calculation. 

In a scenario where revenue is $500 higher than it should be, profit will also be inflated by $500. 

On a larger scale, if the profit calculations are off by 150,000, that will make the company's profit appear to be $150,000 more. 

This is why it is imperative to get your revenue calculations right. 

Final Thoughts

Throughout this article, you have learned a lot about what revenue is, the many types of revenue, how to record revenue transactions, and more. We hope that this article is helpful to you in your pursuit of revenue knowledge! 

Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall