Updated July 6, 2023
Definition of Sales Revenue
The entity earns sales revenue during a period by selling its goods or rendering services, excluding the returns and allowances provided, and reports it in that period’s Income Statement. Revenue excludes sales tax, VAT, etc., collected on behalf of the government.
Explanation
It is the income a company generates through the sales of its goods. It is generally referred to as the ‘Top line item in the company’s income statement. Since revenue is the essential item that affects management’s decision-making, it is important to correctly recognize and record it in the company’s financial statements.
Formula for Sales Revenue
Few things to be noted before calculating it for a period:
- The total revenue does not necessarily mean cash received; rather, it represents the total of goods sold in cash and goods sold on credit.
- The entity further divides revenue into Gross and Net Sales Revenue. Gross Sales Revenue represents the entity’s total sales without deducting returns and any allowances. Net Sales Revenue, conversely, represents the sales generated by the entity after deducting the returns during the period and allowances are given.
- Customers return the products they have purchased for any reason, thus constituting sale returns. Since the returns reduce the entity’s total sales, it has to be netted off while showing the final sales amount.
Formula to calculate Sales Revenue:
In case of the sale of goods
In the case of Rendering services
Examples of Sales Revenue
Example #1 – Sale of Goods
T Ltd is a manufacturer of high-end mobile phones and has sold 2,000 sets during the year 2018. It has sold 1,000 sets at an average price of $1,000 and 500 sets at an average price and $800, and 500 sets at $650. Calculate the Sales revenue of T ltd for 2018.
Example #2 – Rendering of Services
K Ltd provides advisory services to its clients, including meeting them and understanding and evaluating their financial statements, growth strategies, and related activities. K Ltd has provided these services to 5 of its clients, and the average fee is $50,000 from 2 of its customers, $40,000 from 2 of its customers, and $60,000 from one of its customers. First, calculate the total sales revenue of k Ltd for 2018.
Income Statement
It is the first item shown in the income statement. It is the starting point to calculate the net income/loss of the business.
Source: Marketwatch
Regarding the income statement of Amazon above, it is the top most items in the financial statement.
Advantages of Sales Revenue
- Revenue is something a company would like to have increased every day. It is one of the critical factors affecting management’s decision-making.
- It is the starting point for calculating all other significant numbers like Gross profit, EBIT (Earnings before Interest and Taxes), and Net Profits.
- The critical reports are based on the calculations made through sales revenue, like cash flow statements and earnings per share.
- The whole purpose of business is to earn profits, and we can calculate profits only if we have a sales figure.
Disadvantages of Sales Revenue
- The term Sales revenue not only includes the income from the sale of goods or the rendering of services but sometimes also includes the revenue arising from the use of others of the entity’s assets yielding interest, royalties, and dividends. Calculating revenue in such cases is a bit tricky.
- Calculating revenue becomes challenging when the services are rendered in different stages. Therefore, the entity needs to find the completion stage and calculate the revenue and expenses accordingly.
- At times, management is induced to show higher revenues since revenue is the most relevant item in the financial statement. Therefore, knowing when and at what an entity should recognize value revenue.
Conclusion
It is indeed an important figure in the financial statement of a company. Revenue depicts an entity’s market share, size, and growth ability. A business is set with the motive to grow and earn profits. And to make a profit and grow the company, the owner has to understand its Sales Revenue.
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