Revenue vs Income
Revenue refers to the total amount of sales, or receipts during a certain time period. On the other hand, income refers to total earnings or profit.
Revenue comes from the sale of goods and services related to the company’s operations. Revenue can be further divided into two parts:
1. Operating Revenue
This is revenue that comes from the company’s main business activities, such as electricity sales to consumers by a power company, or bread from a bakery.
2. Non-Operating Revenue
How to Calculate Revenue
Revenue is calculated by multiplying the unit price of goods or services by the number of units sold (quantity produced).
Tara’s Bakery was able to sell a total of 500 loaves of bread at $3 per loaf. To compute revenue:
What Is a Contra Revenue Account?
1. Sales Returns
Sales returns refer to the amount of money taken back by the company from a buyer due to unsatisfactory product condition, wrong shipment, or incorrect delivery.
2. Sales Discounts
A discount is subtracted from revenue when goods are purchased before they are sold to customers. Discounts include cash discounts and quantity discounts. A cash discount is given if the terms of purchase are net cash. Cash discounts reduce the amount of money owed to the seller, and thus reduce revenue. A quantity discount is given when a large order is purchased. Quantity discounts encourage larger purchases by enabling lower costs per item and thus increasing revenue.
3. Sales Allowances
A sales allowance is an amount subtracted from revenue which are refunds for damaged, defective, or incorrectly shipped items.
Net revenue refers to gross revenue less any returns, discounts, or allowances. The formula can be broken down into this:
ABC Grocery records a total revenue of $10,000 for the month of June. Its sales discounts for the same month amounted to $500 and sales returns amounted to $250. To compute net revenue:
Income refers to earnings after all expenses have been accounted for. It is an important measure in determining a company’s profitability.
How to Calculate Income
There are several ways to calculate income, but generally, it equals total revenue minus total cost in producing a product or service.
Tara’s Bakery was able to sell a total of 500 loaves of bread at $3 per loaf. The cost to make a loaf is $1. To compute income:
Importance of Knowing the Difference Between Both
The most important distinction between income and revenue is knowing what they can be used for and when they should be used. Income refers to profit or earnings after expenses have been deducted from the gross revenue. Revenue, on the other hand, is not to be neglected as also an important measure in determining a company’s profitability. Knowing the difference between both is very beneficial when it comes to making decisions regarding the pricing of products or services, budgeting, and planning for the future of the business.
The Bottom Line
Revenue refers to the total amount of sales, or receipts during a certain time period. On the other hand, income refers to total earnings or profit. Revenue is calculated by multiplying the unit price of goods or services by the number of units sold. Income is calculated after deducting all expenses from total revenue. Revenue can be further divided into two parts: operating revenue and non-operating revenue. Operating revenue refers to revenue that comes from the company’s main business activities, while non-operating revenue refers to revenue that does not come from the primary business of the company and may include revenue from unrelated activities.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.