What Is Revenue? Definition and Formula

What Is Revenue? Definition and Formula was originally published on Forage.

Revenue shows how much a company makes from selling goods or services. Revenue, or income, is found on several financial statements and is used by finance professionals to determine profitability. For straightforward business models, calculating revenue is fairly simple. But, the more complex the business, the harder it is to determine income accurately. 

In this guide, we’ll go over: 

• Revenue Definition
• Types of Revenue
• Calculating Revenue
• Showing You Understand Revenue on Your Resume
• Related Accounting Skills

Revenue Definition

Revenue, also called income, is the amount of money brought into the company, typically by selling goods, products, or services. Sometimes, revenue is equated to profits, but that correlation is inaccurate. Instead, it is best to think of revenue as sales: how much money the company brings in by selling goods, products, or services. Calculating profit includes accounting for other operating costs, such as the overhead cost of products, marketing, and rent. 

Many companies, specifically public companies, must report their income on a quarterly and annual basis using earnings reports. Even within a private company, you can find total revenue on financial statements, like income sheets and cash flow statements. 

Who Needs to Understand Revenue?

While many careers in finance deal with looking at revenue, accountants often need to calculate, track, and report a company’s income and other financial metrics, such as profit margins.  

Investment bankers may also use revenue as a way to inform investing decisions. Even other finance professionals, like analysts in private equity, will encounter revenue on financial statements and may use it as part of their analysis. 

Types of Revenue

Revenue is the total amount of money a company brings in from selling goods or services, but that may be more complicated than it sounds. There are different types of revenue, either from various sources or from specific times in the transaction process. 

• Operating revenue is income from the company’s primary source of revenue. For example, if a company primarily sells cars but also occasionally sells merchandise throughout the year, its operating revenue would only be from its primary source: cars. 
• Non-operating revenue is income from anything other than the company’s primary source. So, like the above example, a car company that sometimes sells merchandise would count income from merchandise sales as non-operating revenue. 
• Accrued revenue is sometimes called deferred revenue. Accrued revenue occurs when a company has made a sale but hasn’t received payment from the customer. So, the sale is counted as revenue, even though the money doesn’t actually exist yet. Accrued revenue could happen if there is a trial period before full payment is due from the customer, or interest on investments that is yet to be realized. 
• Unearned revenue is the opposite of deferred or accrued revenue. Unearned income is when a customer has already paid for a product or service but hasn’t received it yet. For example, if a contractor takes payment for a bathroom renovation before the renovation is completed, that would be an example of unearned income. It is typically reported as a liability on the company’s financial statements because it is essentially a debt owed to a customer.
• Gross revenue is the total revenue generated by all income sources, including any discounts or returns, but not including expenses or taxes. 
• Net revenue is also called net income, and it shows revenue after all expenses, cost of products sold, depreciation, interest, and taxes have been subtracted. 

>>MORE: Learn if accounting is the right career path for you.

Calculating Revenue

Calculating revenue can be very easy for companies selling only one or two products or services. The formula is: 

Revenue = # of Units Sold x Cost Per Unit 

Some companies may use the average sales price per unit, though that’s not entirely accurate.

Special Considerations in Calculating Revenue

Ultimately, calculating revenue depends on the type of business and the type of accounting. 

For example, in the accrual basis of accounting, revenue is counted even if the cash hasn’t been received for the sale. So, if a company sold $500 of products in March but allows deferred payments until April, the company would report $500 of income for March. The other side of this is the cash basis of accounting. In the cash basis of accounting, a sale only counts once the payment is fully received and processed. 

Choosing which accounting method is largely up to the business and its financial team. However, large companies (income over $5 million per year) may need to use the accrual basis for tax purposes from the Internal Revenue Service (IRS). Additionally, public companies must use the accrual basis due to regulations from the Securities and Exchange Commission (SEC). 

Calculating revenue gets more difficult for larger or more complex businesses. Straightforward business models can use the “number of units multiplied by cost per unit” formula to calculate income. But, not every company is so simple. Many companies need to consider things like returns, refunds, discounts, currency conversion rates, and pricing for different products. 

In Apple’s 2022 annual earnings report, we can see how Apple has a variety of products that are all sold at different prices, often with discounts and returns involved. This is a simplified example. However, the table shows how Apple individually calculates revenue for each of these products.

(Note: This table shows net sales in millions, meaning it include amortization (initial investment in the product is gradually paid off).)

>>MORE: Learn real-world accounting skills with Forage’s accounting virtual experience programs. 

Showing You Understand Revenue on Your Resume

Understanding revenue and how to calculate it is a core skill for accountants and business professionals. Ultimately, previous work experience or internships in accounting will likely show that you know what revenue is. 

However, mention any familiarity with financial statements since revenue is a key part of income statements. Additionally, say if you’ve calculated income for a friend or family member’s small business. Your cover letter is a great spot to go into detail about any accounting experience, especially with practical accounting skills like reading financial statements, calculating profit margins, and tracking a business’s income. 

>>MORE: Learn more ways to feature hard skills on your resume. 

Related Accounting Skills

Anyone interested in accounting needs to know what revenue is and why it matters. Some other skills accountants should possess: 

• Knowing how to calculate profit margins
• Understanding the accounting equation
• In-depth knowledge of generally accepted accounting principles
• Ability to use formulas, such as the quick ratio

See more accounting skills you need for your resume. Also, start learning these skills with Forage’s accounting and finance virtual experience programs.

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