Your company's total revenue for the month, quarter or year, is the total income before you start subtracting expenses. Total revenue can include sales alone or it can include interest and dividends from investments. Calculating total revenue is part of drawing up an income statement.
Tip
To calculate sales revenue, multiply the number of units sold by the price per unit. If you have non-operating income such as interest or dividends, add that to sales revenue to determine the total revenue. You report sales and non-operating revenue separately on your income statement, however.
Calculating Total Revenue
The simplest way to calculate sales revenue is to take the average price of the products you've sold and multiply by the number of units sold. For service industries, revenue is the average price of services provided times the number of customers. If you have the data, however, you can calculate based on individual customer sales or product lines, in as much detail as your data supports.
If sales provide all the revenue, then you're done. If you have non-operating revenue as well, add that to your sales revenue. This type of revenue may include dividend income, gains on investments and gains from foreign exchange transactions.
When you draw up your income statement, you enter non-operating income separately from sales revenue. That way, anyone reading the statement can see how much income you generated from operations rather than other sources. That's important for evaluating how good your business is at earning money.
Total Revenue on the Income Statement
There is no line for total revenue on the income statement, aka the profit and loss statement. You put sales revenue at the top and then subtract the cost of goods sold and operating expenses to determine the total operating income.
If you have non-operating income, losses or expenses, report those in the next section. Then add the two types of revenue together to get the total income. After that, subtract your income taxes to calculate net income.
Revenue and Cash Flow
Businesses can operate on an accrual basis or cash basis. With cash, you only recognize revenue when you receive money. With an accrual basis, you report income when you earn it, even if you're not paid immediately.
The cash flow statement tracks how much money you've been paid or have paid out. Even if your company's income is excellent, you could run out of cash to pay salaries, utilities and other costs if customers aren't paying the bills. You have to track both income and cash flow to manage your finances.
If you operate on an accrual basis like most businesses, your total cash income does not represent total revenue. The amount of cash you've received is only a portion of the revenue you've generated.
Retained Earnings vs. Net Income
Net income affects your company's balance sheet as well as the income statement. This financial statement works like an equation: Total assets equal total liabilities plus the owners' equity in the company. You make out the balance sheet to capture the equation on the last day of the reporting period.
Payments from your customers increase the cash account on the asset side of the equation. If you've made a sale, but the customer hasn't paid yet, that amount goes into the accounts receivable asset account.
On the other side of the balance sheet, an increase in your revenue increases retained earnings. As the name suggests, retained earnings are profits that you keep rather than distributing to the owners as stock dividends. The account includes not only the current period's profit but total retained earnings from the beginning of the company.
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Now, let's delve into the key concepts covered in the article about calculating total revenue and its implications on financial statements:
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Total Revenue Definition: Total revenue is the overall income generated by a company before deducting expenses. It encompasses not only sales but also interest and dividends from investments.
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Calculation of Sales Revenue: Sales revenue is determined by multiplying the number of units sold by the price per unit. For service industries, it involves multiplying the average price of services by the number of customers.
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Inclusion of Non-Operating Income: Non-operating income, such as interest, dividends, gains on investments, and gains from foreign exchange transactions, is added to sales revenue to calculate total revenue. However, these are reported separately on the income statement.
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Income Statement Structure: The income statement, also known as the profit and loss statement, does not have a specific line for total revenue. Instead, it begins with sales revenue, and then the cost of goods sold and operating expenses are subtracted to determine total operating income. Non-operating income is reported in a separate section, and both types of revenue are added to obtain total income.
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Cash Basis vs. Accrual Basis: Businesses can operate on a cash basis or an accrual basis. The cash flow statement tracks actual cash transactions, while the income statement, based on accrual accounting, recognizes income when earned, not necessarily when cash is received. Tracking both income and cash flow is crucial for financial management.
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Relationship Between Net Income and Retained Earnings: Net income, as calculated on the income statement, has implications for the balance sheet. It affects the equation: Total assets equal total liabilities plus owners' equity. Payments increase the cash account, and sales yet to be paid contribute to accounts receivable. On the equity side, an increase in revenue enhances retained earnings, representing profits retained in the company.
Understanding these concepts is essential for effective financial management, decision-making, and ensuring the long-term financial health of a business.
