Everything about Revenue totally explained
In business,
revenue or
revenues (
turnover in Europe) is
income that a
company receives from its normal business activities, usually from the sale of
goods and services to customers. Some companies also receive revenue from
interest,
dividends or
royalties paid to them by other companies. Revenue may refer to business income in general, or it may refer to the amount, in a
monetary unit, received during a period of time, as in "Last year, Company X had revenue of $32 million."
Profits or
net income generally mean total revenue minus total
expenses in a given period. In
accounting and
financial analysis, revenue is often referred to as the "top line" due to its position on the
income statement at the very top. This is to be contrasted with the "bottom line" which denotes net income.
For
non-profit organizations, annual revenue may be referred to as
gross receipts. This revenue includes donations from individuals and corporations, support from government agencies, income from activities related to the organization's
mission, and income from fundraising activities, membership dues, and financial investments such as
stock shares in companies. For
government, revenue includes gross proceeds from income taxes on companies and individuals,
excise duties,
customs duties, other taxes, sales of goods and services, dividends and interest.
Usage
In general usage, revenue is income received by an organization in the form of
cash or cash equivalents.
Sales revenue or revenues is income received from selling goods or services over a period of time.
Tax revenue is income that a government receives from taxpayers.
In more formal usage, revenue is a calculation or estimation of periodic income based on a particular
standard accounting practice or the rules established by a government or government agency. Two common
accounting methods, cash basis accounting and accrual basis accounting, don't use the same process for measuring revenue. Corporations that offer shares for sale to the public are usually required by law to report revenue based on
generally accepted accounting principles or
International Financial Reporting Standards.
In a
double-entry bookkeeping system, revenue accounts are
general ledger accounts that are summarized periodically under the heading Revenue or Revenues on an income statement. Revenue account names describe the type of revenue, such as "Repair service revenue", "Rent revenue earned" or "Sales".
Business revenue
Business revenue is income from activities that are ordinary for a particular corporation, company, partnership, or sole-proprietorship. For some businesses, such as
manufacturing and/or
grocery, most revenue is from the sale of goods. Service businesses such as
law firms and
barber shops receive most of their revenue from rendering services. Lending businesses such as
car rentals and
banks receive most of their revenue from fees and interest generated by lending
assets to other organizations or individuals.
Revenues from a business's primary activities are reported as
Sales,
Sales revenue or
Net sales. This excludes product returns and discounts for early payment of
invoices. Most businesses also have revenue that's incidental to the business's primary activities, such as interest earned on deposits in a
demand account. This is included in revenue but not included in Net Sales. Sales revenue doesn't include
sales tax collected by the business.
Other Revenue (a.k.a. Non-Operating Revenue) is revenue from peripheral (non-core) operations.
For example, a company that manufactures and sells automobiles would record the revenue from the sale of an automobile as “’regular’” revenue. If that same company also rented a portion of one of its buildings, it would record that revenue as “other revenue” and disclose it separately on its income statement to show that it's from something other than its core operations.
A
public company reports its total annual revenues based on its
fiscal year. Public companies also report quarterly revenues.
Internally, companies break revenue down by
operating segment,
geographic region, and
product line.
Revenue recognition and unearned revenue
Standards vary as to when revenue should be recognized. The
Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Concept 5 states that revenues should be recognized when they're “realized or realizable” and “earned”. Revenues are “realized or realizable” when products are exchanged for
assets (such as cash) or claims to assets (such as promises to pay). Revenues are “earned” when the entity has performed all duties necessary to the purchaser.
Often one of the two situations will arise but not both. If assets are received before revenue is earned, a
liability account is created called
Unearned revenue. An example of when this would happen is in the event of magazine subscriptions: suppose a company sold 12 month magazine subscriptions on
July 1,
2005 for $10,000 cash. At the company’s year end,
December 31, the company is still obligated to deliver 6 months, or $5,000, worth of magazines to subscribers. In this case, the company would recognize $5,000 as revenue for 2005, and $5,000 would be seen in the liability account Unearned revenue. A similar situation occurs when a property-casualty
insurance enterprise receives premium at the start of the period insured. The insurer establishes an "unearned premium reserve" for the portion of the premium pro-rated for the unexpired portion of the policy period. (See
earned premium.)
In general, for
US GAAP purposes, revenue should be recognized at time of delivery of the goods or performance of the service. If cash is received prior to this time, revenue is unearned. If cash hasn't yet been received at time of performance, the asset account
Accounts receivable is used to record the revenue. This is in contrast to
IRS revenue recognition policies, which call for revenues to be recognized on a cash received basis. In the above magazine example, the company would have to pay taxes on $10,000 of "revenue" for 2005.
Financial analysis
Revenue is a crucial part of
financial analysis. A company’s performance is measured to the extent to which its asset inflows (revenues) compare with its asset outflows (
expenses).
Net Income is the result of this equation, but revenue typically enjoys equal attention during a standard
earnings call. If a company displays solid “top-line growth,” analysts could view the period’s performance as positive even if earnings growth, or “bottom-line growth” is stagnant. Conversely, high income growth would be tainted if a company failed to produce significant revenue growth. Consistent revenue growth, as well as income growth, is considered essential for a company's publicly traded
stock to be attractive to investors.
Revenue is used as an indication of earnings quality. There are several
financial ratios attached to it, the most important being
gross margin and
profit margin. Also, companies use revenue to determine
bad debt expense using the income statement method.
Price / Sales is sometimes used as a substitute for a
Price to earnings ratio when earnings are negative and the P/E is meaningless. Though a company may have negative earnings, it almost always has positive revenue.
Gross Margin is a calculation of revenue less
Cost of Goods Sold, and is used to determine how well sales cover direct variable costs relating to the production of goods.
Net Income / Sales, or
Profit margin, is calculated by investors to determine how efficiently a company turns revenues into profits.
Government revenue
Government revenue comes primarily from taxes but includes all amounts of money received from sources outside the government entity. Large governments usually have an
agency or
department responsible for collecting government revenue from companies and individuals
Further Information
Get more info on 'Revenue'.
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