What Is Revenue?
Revenue is the amount of money generated from the sale of goods or services. It is the top line item on a company’s income statement and is often referred to as gross income—much in the same way that term is used to described a person’s annual income before taxes and deductions. For publicly traded companies, revenue is found in the income statement of their regular quarterly and annual financial statements filed with the Securities and Exchange Commission.
Investors and analysts sometimes use revenue and sales interchangeably, though there is a technical difference. Sales refers to the amount generated from selling goods, while revenue refers to money made from selling goods and services. In investor parlance, revenue is the top line figure before all costs have been deducted; conversely, net income—found in the lower portion of the income statement—is the bottom line, after all costs have been deducted.
Revenue is not a universal term used by companies or organizations to record the amount of money that comes in, and companies have their own way of recording the amount of money generated from their operations based on their industry. For example, while manufacturers like food and car makers classify the sale of their packaged foods and automobiles simply as sales, banks record their income as interest from the loans disbursed to consumers or commercial businesses. Insurance companies book the money they make from selling plans as premiums. A private security provider lists its services for monitoring and installation of devices as revenue. For non-profit organizations, gross receipts account for donations.
How Is Revenue Recognized?
Revenue recognition takes place once a company receives cash from the sale of its goods and/or services, and there is no way for customers to claim returns. It can be more complex when customers are given credit or when clients place orders ahead of time because companies don’t receive cash immediately. In such cases, a company would record these liabilities as unearned revenue, and revenue would be recognized when goods and/or services are delivered over a period of time. Typically, a company would take stock from its inventory and record the shipment as revenue when it's delivered.
An example would be a bicyclist placing an order with a bike frame maker for a customized frameset. The bicyclist lists items required for the frameset, and the frame maker sets the price and requests a 50 percent downpayment because it will take a year to build due to a backlog in orders. The customer pays half upfront, and the frame maker won’t recognize the remaining half as revenue until he delivers the frame to the customer by the end of 12 months. If the bicyclist is unlikely to pay the remaining amount due when the frameset is completed, then the frame maker won’t be able to record the sale for the remaining half and is likely to take a loss for the costs of materials and labor.
In terms of contracts, revenue can be recognized over periods of time. For example, if a contractor agrees to construct a building in three years, it will record revenue each year of the project’s three-year plan.
Each company has its own method of revenue recognition, and its definition can be found in the text of the financial statement. It can be as brief as a few paragraphs or as lengthy as a few pages. Tesla, for example, explains in detail how it derives its revenue from a variety of sources, from automotive sales and leases of its electric vehicles to solar energy generation and energy storage sales.
What Are Examples of Revenue?
Below is an example of two of the biggest companies listed on the S&P 500 Index. Their market capitalizations are large, and thus, their businesses are equally as vast that they require listing their sources of revenue separately by line item.
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Berkshire Hathaway is a holding company with a wide range of investments—including in insurance, banking, food manufacturing, transportation, and energy—it needs to break down its sources of revenue by type.
JPMorgan Chase isn’t just a bank. Its noninterest revenue, derived from investment banking to trading stocks, is larger than the money it makes from loans, and it also breaks down those sources.
Both companies offer clues to investors on how separate businesses contribute to the top line. Some companies in other countries are less transparent in their source of revenue and simply list sales or services.
|Company||Third Quarter, 2021|
Insurance and Other:
Insurance premiums earned
Sales and service revenues
Interest, dividend and other investment income
Railroad, Utilities and Energy:
Freight rail transportation revenues
Energy operating revenues
Service revenues and other income
Investment banking fees
Lending- and deposit-related fees
Asset management, administration and commissions
Investment securities gains/(losses)
Mortgage fees and related income
Net interest income
Total net revenue
What Is Revenue Used For?
Revenue is a fundamental element of running a business. It’s money coming in (inflow), whereas expenses are money going out (outflow). Revenue is one of the basic components of a financial statement, with the others being: assets, liabilities, owners’ equity, and expenses. Revenue pays for all expenses associated with operating a company’s activities, ultimately leading to its bottom line figure, net income.
While a company’s goal is to be as profitable as it can be, executive management has to be cognizant of expenses, particularly cost of goods sold (attributable primarily to the costs of materials and labor) and operating costs (which include marketing and research and development). In general, the more revenue a company accumulates, the more profit it tends to generate. But this is not always the case because of expenses, especially if costs exceed revenue.
How Is Revenue Used in Analyzing Companies?
Revenue is used in different metrics—whether it be in measuring profitability or in appraising the performance of executive management. Revenue is part of the formula in profitability ratios, such as gross profit margin and net profit margin, where it serves as the denominator. Among valuation ratios, it’s used in the enterprise value to sales.
Frequently Asked Questions (FAQ)
The following are answers to some of the most common questions investors ask about revenue.
What Is the Difference Between Revenue and Sales?
Revenue represents sales from goods and services, while sales represents money coming from the sale of goods only. Investors may reference either term for a company’s top line figure.
Can Revenue Be Recognized Before Delivery?
There may be instances in which a company can recognize revenue prior to delivery in special sales transactions. In one example, a company requires a customer to submit a partial payment because of highly specialized customized work. The company records that partial payment as an advance, and when all deliveries have been made, both debit and credit columns in a journal entry in accounting balance out.
Is a Gain Considered Revenue?
A gain is similar to revenue but is typically a one-time item that is outside the normal business operations of a company. In the income statement, it can be recorded after tax payments and expenses but is listed just before the net income line item.