Revenues
Revenues are the income generated from normal business operations and include discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income. Revenue is also known as sales on the income statement. It is vital for a startup to get positive revenue early.
Revenue Formula
The revenue formula may be simple or complicated, depending on the business. For product sales, it is calculated by taking the average price at which goods are sold and multiplying it by the total number of products sold. For service companies, it is calculated as the value of all service contracts, or by the number of customers multiplied by the average price of services.
Revenue = No. of Units Sold x Average Price
or
Revenue = No. of Customers x Average Price of Services
The formulas above can be significantly expanded to include more detail. For example, many companies will model their revenue forecast all the way down to the individual product level or individual customer level.
Examples of Revenue
In the case of government, revenue is the money received from taxation, fees, fines, inter-governmental grants or transfers, securities sales, mineral or resource rights, as well as any sales made. For non-profits, revenues are its gross receipts. Its components include donations from individuals, foundations, and companies; grants from government entities; investments; fundraising activities; and membership fees.
In terms of real estate investments, revenue refers to the income generated by a property, such as rent, parking fees, on-site laundry costs, etc. When the operating expenses incurred in running the property are subtracted from property income, the resulting value is net operating income.
How does one generate revenue?
For many companies, revenues are generated from the sales of products or services. For this reason, revenue is sometimes known as gross sales.
Revenue can also be earned via other sources. Inventors or entertainers may receive revenue from licensing, patents, or royalties. Real estate investors might earn revenue from rental income. Revenue for federal and local governments would likely be in the form of tax receipts from property or income taxes. Governments might also earn revenue from the sale of an asset or interest income from a bond. Charities and non-profit organizations usually receive income from donations and grants. Universities could earn revenue from charging tuition but also from investment gains on their endowment fund.
What is accrued and deferred revenue?
Accrued revenue is the revenue earned by a company for the delivery of goods or services that have yet to be paid by the customer. In accrual accounting, revenue is reported at the time a sales transaction takes place and may not necessarily represent cash in hand. Deferred, or unearned revenue can be thought of as the opposite of accrued revenue, in that unearned revenue accounts for money prepaid by a customer for goods or services that have yet to be delivered. If a company has received prepayment for its goods, it would recognize the revenue as unearned, but would not recognize the revenue on its income statement until the period for which the goods or services were delivered.
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