What Is Gross Revenue? Income Before Costs and Taxes
Discover the meaning of gross revenue, a company's total sales income before any costs are subtracted, and its role as the top line on an income statement.
Gross revenue is the total income a company generates from its sales of goods or services before any costs or expenses are deducted. This figure, also known as total revenue, represents the unadjusted amount of money earned from a company’s primary business activities. It provides a clear picture of the income generated from operations without considering the costs of running the business.
Calculating Gross Revenue
The calculation for gross revenue multiplies the sale price of a single unit by the total number of units sold during a specific period. For instance, if a bakery sells 5,000 loaves of bread in a month at $4 each, its gross revenue for that month would be $20,000. This calculation remains direct even with multiple products; the gross revenue from each product line is simply added together to find the total.
For businesses that provide services, the principle is the same. A consulting firm calculates its gross revenue by totaling all invoices billed to clients for services rendered. If the firm completed ten projects, each billed at $5,000, its gross revenue would be $50,000. This figure represents the total earnings from its core service operations before any adjustments or expenses.
Distinguishing Gross Revenue from Net Revenue
While gross revenue shows the total amount of money generated from sales, net revenue provides a more refined picture by accounting for certain deductions. Net revenue is calculated by taking gross revenue and subtracting sales adjustments. These adjustments typically fall into three categories: sales returns, sales allowances, and sales discounts.
Sales returns occur when customers send back products for a full refund. Sales allowances are price reductions given to customers for minor defects in a product they decide to keep. For example, if a clothing store sells a shirt for $50 that has a small flaw, it might offer the customer a $10 allowance to keep it, reducing the revenue from that sale to $40.
Sales discounts are reductions offered to customers as an incentive for early payment. A common example is a term like “2/10, n/30,” which means a customer can take a 2% discount if they pay their invoice within 10 days. If a company has $100,000 in gross revenue but experiences $5,000 in returns, $2,000 in allowances, and $3,000 in discounts, its net revenue would be $90,000.
Gross Revenue on the Income Statement
On a company’s income statement, gross revenue is the first line item, often labeled as “Revenue” or “Sales.” This placement at the top is why it’s frequently called the “top line.” From this initial figure, various expenses are systematically subtracted to determine a company’s ultimate profitability.
Following the gross revenue line, the next deduction is the Cost of Goods Sold (COGS), which includes the direct costs of producing the goods or services sold. Subtracting COGS from revenue yields a subtotal called gross profit. For example, if a company has $500,000 in revenue and its COGS is $200,000, its gross profit is $300,000.
From gross profit, all other operating expenses—such as salaries, rent, marketing, and utilities—are subtracted. After these deductions, interest and taxes are also taken out. The final number at the bottom of the income statement is net income, often referred to as the “bottom line.”