What Is the Definition of Revenue in Business?
Explore the foundational metric of business finance. Understand how revenue is precisely measured and why it differs from a company's actual profit.
Revenue is the total income a business generates from its primary operations of selling goods or providing services. This figure is a starting point for understanding a company’s financial health, as it reflects the effectiveness of its sales and marketing efforts. Revenue is calculated before any expenses are subtracted, making it a measure of the funds brought into a company over a specific period.
Components of Revenue
A company’s total revenue is composed of funds from different sources, which are categorized based on their relationship to the main business activities. These are separated into operating and non-operating revenues.
Operating Revenue
Operating revenue is the income generated from a company’s principal business activities. For a retail company, this would be the money from selling merchandise, while a law firm generates it by providing legal services. These are the sales directly related to the purpose of the business.
This type of revenue is the most sustainable and predictable source of income. For example, a software company’s operating revenue comes from subscription fees, and a car manufacturer’s is derived from vehicle sales.
Non-Operating Revenue
Non-operating revenue comes from activities that are not part of a company’s core business operations, so this income is often incidental. Examples include a company earning interest on its bank accounts or renting out unused office space. Another source is the gain from the sale of an asset. If a construction company sells old machinery for more than its recorded value, the profit from that sale is considered non-operating revenue.
Calculating Gross and Net Revenue
Gross revenue represents the total sales, while net revenue reflects what the company keeps after certain deductions. This provides a more realistic picture of the income generated from sales.
Gross revenue is the total income from all sales before any deductions are made. The calculation is the sale price per unit multiplied by the number of units sold. For instance, if a company sells 1,000 widgets at $50 each, its gross revenue is $50,000.
To arrive at net revenue, certain deductions are subtracted from the gross revenue. Common deductions include sales discounts, sales returns for the value of goods returned by customers, and sales allowances for damaged goods that the customer keeps. For example, if the widget company had $2,000 in returns and offered $1,000 in discounts, its net revenue would be $47,000 ($50,000 – $2,000 – $1,000).
Revenue on the Income Statement
On a company’s income statement, revenue is the first item listed and is often called the “top line.” This placement signifies its role as the starting point from which all costs and expenses are subtracted to determine profit.
After the revenue figure, all operating expenses, such as the cost of goods sold, marketing, and administrative costs, are subtracted to find the operating income. After further subtracting non-operating expenses like interest and taxes, the final number is net income, or the “bottom line.”
High revenue does not automatically mean high profit. A company can generate substantial revenue but have its profits diminished by high expenses. For example, a business could have $1 million in revenue but $950,000 in expenses, leaving a net income of only $50,000.
The Principle of Revenue Recognition
The revenue recognition principle dictates that revenue should be recorded when it is earned, not necessarily when cash is received. This is a concept of the accrual basis of accounting, which is standard for most companies. Revenue is considered “earned” once the company has fulfilled its obligation to the customer, such as delivering a product or performing a service.
For example, if a consulting firm completes a project in December but is not paid until January, the $10,000 revenue is recorded in December. This method contrasts with cash-basis accounting, where revenue is recorded only when payment is received. The accrual method provides a more accurate picture of a company’s financial performance by following guidance from the Financial Accounting Standards Board (FASB).