Revenue Definition (With Types, Formulas and Examples)
Updated September 28, 2023
Revenue is essential for almost every type of business. Companies generally must generate revenue to justify the fixed and variable expenses they pay to operate.
In this article, we discuss what revenue is and how different types of revenue work, with examples to help clarify.
Revenue, also known as sales or top line, is the money earned from normal business operations.
Operating revenue is generated from a company's core business operations, and is typically the area where a company earns most of its income.
Non-operating revenue is generated from activities not related to your company's core business operations, such as the revenue earned from interest or selling assets.
What is revenue?
Revenue is income earned by an individual or a business from the sale of any products or services offered. Expenses are deducted from a company’s revenue to calculate its profit on an income statement.
Revenue is often referred to as the “top line,” as it sits at the top of a company's income statement. The top line refers to a company's revenue or gross sales. When a company has top-line growth, it means that it is selling more of its products or services. All businesses aim to increase their revenue and lower their expenses to generate maximum profit, which is stated as net income or “bottom line” on an income statement.
Declining revenues year after year means that a company is shrinking or faltering. Generally, the more revenue a company generates, the more money it has to work with to pay down expenses and generate a profit.
For any new business, the ultimate goal is to generate revenue quickly and effectively and keep the cost of production or service as low as possible.
Revenue is made up of two important parts: the sales price and the number of units sold.
Revenue = average price of product x number of units sold
Alternatively, if the business sells a service instead of a specific product or products:
Revenue = average price of service x number of customers
These simple formulas can be expanded to include revenue forecast factors.
Related: How To Calculate Total Revenue
Types of revenue
There are two different categories of revenues seen on an income statement: operating revenues and non-operating revenues.
Operating revenue is generated from a company's core business operations and is the area where a company usually earns most of its income. What constitutes operating revenue varies depending on the nature of the business or industry.
Here are a few examples of operating revenue:
Sales: A sale refers to the exchange of goods for cash or cash equivalent. For instance, a clothing retailer would record the income from selling shirts to customers as sales or merchandise sales.
Rents: Landlords earn rental income by allowing tenants to reside in their buildings or occupy their land. The tenants usually have to sign a rental contract that details the rental terms.
Consulting services: Consulting services, also called professional services, refers to income derived from providing a service to clients or customers. For instance, law firms record professional service revenues when they provide legal services to clients.
Non-operating revenue is derived from activities not related to your company's core business operations, usually non-recurring or unpredictable transactions. Some examples of non-operating revenue include:
Interest revenue: This is the most common form of non-operating revenue, as most companies earn small amounts of interest from their checking and savings accounts. Interest income not only includes bank account interest but also interest accrued from accounts receivable or other contracts.
Sale of an asset or equipment: This refers to proceeds received for usually a one-time sale of an asset or equipment that a company no longer needs.
Accrued and deferred revenue
Accrued revenue is the revenue that a company earns for goods and services that have been delivered but not yet paid for by the customer. In accrual accounting, revenue is reported at the time of a sales transaction and not necessarily when the funds have been received.
Deferred revenue, or unearned revenue, is the opposite of accrued revenue. In this case, a customer pays for goods or services in advance before they are delivered. The payment is reported as a liability on an income statement until the customer receives the goods or services.
Revenue is typically calculated at the end of each reporting cycle, which can be monthly, quarterly or annually. Once a company has calculated its revenue by aggregating the amount in sales for the given time period, it reports it on its financial statements. However, there are two different ways to calculate revenue based on the accounting method followed by the company.
Example: If a company sells $65,000 worth of widgets in December but allows the customer to pay 30 days later, the company's revenue for December is $65,000—even though it hasn't received cash in December.
Reporting revenues in the period in which the transaction occurs is called the “accrual accounting method,” which allows a company to count sales in a reporting cycle even if the cash for the sale was not collected. However, if a company reports its revenues when cash is collected, it is called the cash accounting method.
The accounting method a business chooses could impact the way its financials look, as revenues not only affect a company’s income statement, but also its balance sheet.
Examples of revenue
The following are some examples of revenue across various sectors:
Government revenue: In federal, state and local government, revenue refers to the money an entity receives from fines/penalties, property and sales taxes, income taxes, corporate payroll contributions, rental fees, intergovernmental transfers and securities sales.
Nonprofit organization revenue: In the nonprofit world, revenue refers to individual donations, government grants, fundraiser collections, hosted event fees, membership fees and grants received from foundations. Unlike for-profit businesses, nonprofits use revenue to pay employees, fund development projects and meet business objectives.
Revenue from real estate investments: In corporate real estate, revenue refers to any income that a property generates, such as a business conference or banquet rooms, room rentals, parking space fees and recreational facility fees.
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