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What is Revenue? Definition, Type, and How to Calculate It

Everyone who runs a business aims to earn revenue and income. Both are, of course, very important because they will make businesses and companies grow and achieve goals. However, do you know that actually “revenue” and “income” are two different things? Many people still do not realize that both are different to one another. Because of this ignorance, many people also misuse the two terms. Sometimes it is confusing, both for internal companies and even worse for investors outside the company. 

Have you ever wondered what the difference between the two is?

What is Revenue?

Revenue (hereinafter referred as proceed) is the value of all sales of goods and services recognized by a company in a period. Proceed can also be interpreted as temporary equity that is included in the calculation of business profits. In general, it will be on the top of the financial statements, which will be calculated each period.

Types of Revenue

Revenue itself is divided into two types, namely operating and non-operating. Simply, the operating one is obtained from the company’s operational activities, such as products or services sales. Meanwhile, the non-operating one is obtained from activities outside the company’s operations, such as interest on deposits, shares, and other additional activities that are beneficial for the company.

Factors that Affect Revenue

The amount of proceed received can be influenced by various things. The main thing that affects proceed is the number of sales of goods or services of the company. If the company succeeds in getting large sales, the proceed received by the company will be significant, and vice versa.

In addition to the level of sales, other several factors are influence the proceed. These factors include interest rates, currency exchange rates, prices of products and services, and the large variety of products and services offered. Not only that, but discount offers and returns, and refund services will also determine the amount of proceed earned by the company. Moreover, companies that spread their wings through digital promotions such as websites will also consider visitor traffic as one of the determinants of proceed.

Ways to Calculate Revenue

Total Revenue (TR)

Total revenue is the most basic calculation in calculating proceed because this will be the basis for calculating other types of proceed. We can calculate the TR by multiplying the selling price per unit by the amount of production. The total revenue formula is shown as follows.

Total Revenue = Selling Price per Unit x Product Sold Quantity 

TR = P x Q

Average Revenue (AR)

After calculating the TR, then proceed with the calculation of average revenue. We can calculate the AR by dividing the total revenue by the quantity of products sold. The formula for calculating average income is as follows.

Average Revenue = Total Revenue : Quantity of Product Sold

AR = TR : Q

Marginal Revenue (MR)

The third calculation is calculating the marginal revenue. MR itself is an additional proceed due to each additional unit of goods sold. The marginal revenue formula is as follows.

Marginal Revenue = Additional Total Revenue : Additional Product Sold 

MR = ΔTR : ΔQ

Definition of Income/Profit

Income is the company profit. If proceed refers to the money successfully received by the company, income is more likely to be the total net profit of all company revenues. Income is the net income because income results from the total proceed of all production costs.

Ways to Calculate Income

As we discussed earlier, proceed and income are two different things, so is the calculation method. Here are some ways to calculate income:

Gross Profit

We calculate the gross profit by subtracting revenue with the cost of goods sold. The formula for gross profit is as follows.

Gross Profit = Revenue – Cost of Goods Sold

Net Profit

We calculate the net profit by subtracting the gross profit with the necessary expenses, such as taxes, administrative fees, and others. The form of a net profit formula is as follows.

Net Profit = Gross Profit – Expenses

Difference between Revenue dan Income

Two things broadly distinguish the two, which are based on the source and method of calculation. 

Based on the source

Proceed and income come from different sources. The company obtains proceed from sales, yields, interest on deposits, and investments in specific instruments whose value can be measured as a source of proceed. Meanwhile, companies only gain income from business results or company sales activities, both product sales and service sales.

Based on the calculation method

We can calculate proceed by adding up the components of costs or revenues. There are several ways to calculate proceed, namely total, average, and marginal revenue. However, in calculating the company’s income, there are two calculation methods, namely gross profit and net profit.

Is it Better to Invest in Revenue or Income? 

Both proceed and income certainly provide benefits for the company. However, if we need to choose from the investor’s perspective, then the value of income will be better consideration for investment decisions. This is because the stock value of the company will increase if the company’s income increases.

Effortless Way to Calculate Revenue and Income

Some companies still calculate their proceed and income manually. Doing manual calculations is hard and tiring. Therefore, most companies have started to calculate proceed, income, and other accounting calculations using the accounting system. This accounting system will facilitate the preparation of the company’s financial statements to make reports quickly and accurately.

Do you find it difficult and overwhelming when calculating your company’s proceed and income? Do not worry, we have the solution! Hashmicro provides the best Accounting System for enterprises in Singapore. Automate cash management, financial report generation, bank reconciliation, adjusting journal, invoice creation, and other features to support company financial management. Register your company now!

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Anak Agung Istri Karlita Aprilianti
Junior Creative Content Writer at Hashmicro.

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