Revenue at Gross or Net
The terms “gross revenue” and “net revenue” refer to the total income generated by a business before and after deductions, respectively. Here’s a closer look at each:
- Gross Revenue (or Gross Sales):
- This represents the total revenue from goods sold or services provided during a particular period without any deductions.
- It does not account for any costs or expenses.
- For instance, if a retailer sells 100 shirts at $20 each, the gross revenue would be $2,000.
- Net Revenue:
- This is the amount left after subtracting certain deductions from the gross revenue.
- Common deductions might include returns, allowances, discounts, and any other amounts that are deducted from gross sales.
- Continuing with the previous example, if the retailer had $200 in returns and $100 in discounts given, the net revenue would be: $2,000 (gross revenue) – $200 (returns) – $100 (discounts) = $1,700.
In general, when analyzing a company’s financial health or performance, both gross and net revenues can provide valuable insights. Gross revenue provides a snapshot of total sales, while net revenue offers a more realistic view of the money that actually comes into the business after accounting for deductions.
Example of Revenue at Gross or Net
Let’s use a simple example of a bookstore to illustrate the difference between gross revenue and net revenue.
Bookstore Example
Gross Revenue:
- In the month of January, the bookstore sold 1,000 books.
- Each book was priced at $10.
- So, the gross revenue for January = 1,000 books x $10/book = $10,000.
Deductions:
- 50 books were returned by customers, leading to a total return amount of $500 (50 books x $10/book).
- The bookstore had a promotional discount of $1 off per book for 100 books. That’s a total discount amount of $100.
- There were damaged books that couldn’t be sold amounting to $200.
Net Revenue:
To calculate the net revenue, we’ll subtract all the deductions from the gross revenue:
- Gross revenue: $10,000
- Minus returns: $500
- Minus discounts: $100
- Minus damages: $200
- Net revenue = $10,000 – $500 – $100 – $200 = $9,200.
So, while the bookstore’s gross revenue for January was $10,000, its net revenue (after accounting for returns, discounts, and damages) was $9,200.
