Revenues, often referred to as “sales,” represent the total amount of money taken in by a business or entity before any expenses are subtracted. It’s the gross income the business generates from its principal operations, which may include selling goods, providing services, or other activities related to its core business operations.
Revenues serve as a starting point on an income statement, and they provide a top-line view of a company’s financial performance. From revenues, various expenses, deductions, and taxes are subtracted to determine the net income or profit of a business.
Here are some key points to understand about revenues:
- Multiple Sources: For many companies, especially diversified ones, revenues can come from various sources, such as sales of different products, services, licensing, commissions, and interest income.
- Not Always Cash: Revenues recognized on an income statement may not always represent cash received during that period. For example, if a company follows accrual accounting principles, it can recognize revenue when a sale is made, even if the customer will pay at a later date.
- Recognition Criteria: Revenue is typically recognized when it is earned and realizable or realized, irrespective of when payment is received. This is in line with the revenue recognition principle in accounting.
- Doesn’t Include Non-operating Income: While revenue includes amounts earned from a company’s main business activities, it typically doesn’t include non-operating or other income, like gains from the sale of assets or interest income from investments, unless those activities are central to the business’s primary operations.
Example of Revenues
Prestige Pianos Inc. manufactures and sells grand pianos. Here’s a summary of its transactions in the month of January:
- Direct Sales: Prestige sold 10 pianos directly to customers at $10,000 each.
- B2B Sales: Prestige sold 5 pianos to a retailer, with an agreement that the retailer would pay in February. Each piano was sold for $9,000.
- Service Revenue: The company also offers tuning services and earned $2,000 from tuning services provided in January.
- Rental Revenue: Prestige rents out pianos for events and earned $1,000 in rental fees during the month.
Now, let’s calculate the total revenue for Prestige Pianos Inc. for January:
- Direct Sales Revenue:
- 10 pianos x $10,000 = $100,000
- B2B Sales Revenue (even if they haven’t received the cash yet):
- 5 pianos x $9,000 = $45,000
- Service Revenue:
- $2,000 (from piano tunings)
- Rental Revenue:
Combining all these, the total revenue for January is: $100,000 (Direct Sales) + $45,000 (B2B Sales) + $2,000 (Service) + $1,000 (Rental) = $148,000
So, for January, Prestige Pianos Inc. would report a total revenue of $148,000 on its income statement. It’s important to note that while the B2B sales revenue of $45,000 is included in January’s revenue, the cash for this sale will only be received in February. This reflects the idea that under the accrual basis of accounting, revenues are recognized when earned, not necessarily when cash is received.