- Types of Revenue
Revenue refers to the total amount of money generated from sales of goods, services, or other sources of income during a specific period. It is often referred to as the "top line" because it appears at the top of a company's income statement or financial statement, indicating the starting point for calculating profitability and other financial metrics.
Revenue is a crucial metric as it represents the inflow of funds that a company receives from its primary business activities. It's important to note that revenue is distinct from profit (or net income) because revenue accounts for all incoming money, while profit deducts various costs and expenses to determine the net earnings.
Types of Revenue
Gross revenue: Often referred to as "gross sales" or "total revenue," is the total amount of money generated by a business from its primary operations before deducting any costs, expenses, or deductions.
Net revenue: Net revenue is the total revenue a business generates from its primary operations after subtracting certain deductions, such as returns, allowances, and discounts. It represents the actual revenue that a company retains from its sales or services once these deductions are accounted for.
Sales/Service Revenue: This is the most basic form of revenue and represents the money earned from selling products or services to customers. It's often the primary source of income for businesses.
Deferred Revenue: Deferred revenue, also referred to as "unearned revenue" or "deferred income," describes a scenario in which a company obtains payment from its customers for products or services that it hasn't yet provided. Instead of immediately recording this received payment as revenue, the company categorises it as a liability on its balance sheet until products or services are actually delivered or the contractual obligations are met.
Accrued Revenue: Accrued revenue pertains to earnings that a company has garnered but hasn't yet collected in cash or any other form of payment. This situation arises when a business delivers products or services to customers but hasn't yet invoiced them or received payment for the provided goods or services.
- Sales Revenue / Gross Revenue = Number of Units Sold × Price per Unit
- Net Revenue = Gross Revenue - Returns and Allowances - Discounts
- Deferred Revenue = Number of Prepaid Units × Price per Unit
- Accrued Revenue = Quantity of Goods/Services Provided × Unit Price
Let's consider a month where ABC Electronics sells 100 televisions at a price of Rs 30,000 each and 200 smartphones at a price of Rs 15,000 each.
Gross Revenue = (Total Televisions Sold × Price per Television) + (Total Smartphones Sold × Price per Smartphone)
Gross Revenue = (100 × Rs 30,000) + (200 × Rs 15,000)
Gross Revenue = Rs 6,000,000
Let's consider the same month when ABC Electronics sells 100 televisions at a price of Rs 30,000 each and 200 smartphones at a price of Rs 15,000 each. Additionally, let's assume that 5 televisions and 10 smartphones were returned by customers due to defects.
Net Revenue = (Total Televisions Sold - Returned Televisions) × Price per Television + (Total Smartphones Sold - Returned Smartphones) × Price per Smartphone
Net Revenue = ((100 - 5) × Rs 30,000) + ((200 - 10) × Rs 15,000)
Net Revenue = Rs 5,700,000
In the month of January, ABC Electronics sold 50 "Tech Support Packages" at Rs 2,000 each.
Deferred Revenue = Total Packages Sold × Fee per Package
Deferred Revenue = 50 × Rs 2,000
Deferred Revenue = Rs 100,000
At the time of sale, the company hasn't provided the full scope of services covered by the "Tech Support Package." Instead of recognising the entire Rs 100,000 as revenue, ABC Electronics records it as deferred revenue on its balance sheet.
At the end of the financial year in March, ABC Electronics provided maintenance services to 200 customers who have active annual maintenance contracts. Each contract is priced at Rs 1,500.
Accrued Revenue = Total Contracts Serviced × Fee per Contract
Accrued Revenue = 200 × Rs 1,500
Accrued Revenue = Rs 300,000
Even though the financial year is ending and the billing cycle for many customers falls in the following month, ABC Electronics recognises the Rs 300,000 as accrued revenue for the current financial year. This is because the company has already provided maintenance services, and it's reasonably certain that it will be able to collect the fees from these customers in the coming month.