Sales Revenue


Definition of Sales Revenue

Sales Revenue is the income earned by the entity during a period through the sale of its goods or rendering of services, excluding the returns and allowances provided, and is reported in the Income Statement of that period. Sales tax, VAT, etc., collected on behalf of the government is excluded from revenue.

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:

  • Total revenue does not necessarily mean cash received; some items may be sold on credit. Hence, it is the total of goods sold in cash and goods sold on credit.
  • Revenue is further divided into Gross and Net Sales Revenue. Gross Sales Revenue is the total sales generated by the entity without deducting returns and any allowances. Net Sales Revenue is sales generated by the entity less the returns during the period and allowances given.
  • Sale returns are the products sold but later returned by the customer for any reason. 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

No. of Units Sold * Average Sales Price per Unit

In the case of Rendering services

No. of Customers * Average Price per Service

Examples of Sales Revenue

Different examples are mentioned below:

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.

Calculate Sales Revenue

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.

Sales Revenue-1.2

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.

Income statement

Source: https://www.marketwatch.com/investing/stock/amzn/financials

Regarding the income statement of Amazon above, it is the top most items in the financial statement.

Advantages of Sales Revenue

Some of the significant advantages are mentioned below:

  • 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 doing business is earning profits, and profits can only be calculated if we have a sales figure.

Disadvantages of Sales Revenue

Some of the major disadvantages are mentioned below:

  • The term Sales revenue not only includes the income from the sale of goods or 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 in case the services are rendered in different stages is difficult. Therefore, the entity needs to find the completion stage and calculate the revenue and expenses accordingly.
  • Since revenue is the most relevant item in the financial statement, the management, at times, is induced to show higher revenues. Therefore, knowing when and at what value revenue should be recognized by an entity.

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.

Recommended Articles

This is a guide to Sales Revenue. Here we also discuss the definition and examples along with advantages and disadvantages. You may also have a look at the following articles to learn more –

  1. Accrued Revenue
  2. Revenue vs Net Income
  3. Revenue Recognition Principle
  4. Revenue Reserve

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