What is rotation? Definition, formula, calculation and example (2023)

What is income?

Revenue is cash generated from normal business operations, calculated as the average selling price multiplied by the number of units sold. It is the top line amount (or gross income) from which costs are subtracted to determine net income. Revenue is also known as sales in theincome statement.

understand income

Revenue is the money that comes into a business through its business activities. There are different ways of calculating income, depending on the accounting method used.precision accountingIt will include credit sales as revenue for goods or services delivered to the customer. Under certain rules, revenue is recognized even if payment has not yet been received.

It is necessary to check thecash flow statementto assess how efficiently a company collects money owed.cash accounting, on the other hand, will only count sales as revenue when payment is received. Money paid to a company is known as a "receipt". It is possible to have receipts without a prescription. For example, if the customer has paid in advance for a service that has not yet been provided or goods that have not yet been delivered, this activity generates a receipt but not revenue.

Revenue is known as the top line because it appears first on a company's income statement. Net income, also known as bottom line, is revenue minus expenses. There is aprofitwhen income exceeds expenses.

To increase profits and thereforeearnings per share(EPS) for its shareholders, a company increases its income and/or reduces its expenses. Investors often consider a company's revenue and net income separately when determining the health of a business. Net income can grow while revenue remains stagnant due to cost reduction.

Such a situation does not bode well for a company's long-term growth. When public companies report theirquarterly earningsTwo numbers that get a lot of attention are revenue and EPS. A company that does or does not exceed analysts' expectations in terms of revenue and earnings per share can often change the price of a share.

types of income

A company's revenue can be subdivided according to the divisions that generate it. For example, Toyota Motor Corporation might classify revenue by vehicle type. Alternatively, you can choose to group revenue by car type (i.e. compact or truck).

A company can also distinguish revenue between tangible and intangible product lines. For example, Apple products include the iPad, Apple Watch and Apple TV. Alternatively, Apple may be interested in separately examining its Apple Music, Apple TV+ or iCloud services.

Income can be divided intooperating profit—sales from a company's core business—and non-operating income derived from secondary sources. Because these non-operating revenue streams are often unpredictable or non-recurring, they may be referred to as one-time earnings or events. For example, proceeds from the sale of an asset, a windfall on an investment, or money awarded through litigation are non-operating income.

Income Formula and Calculation

The revenue formula and calculation vary across companies, industries, and sectors. A service company will have a different formula than a retailer, while a company that doesn't accept returns may have different calculations than companies with return terms. Generally speaking, the formula for calculating net income is:

Net revenue = (Quantity sold * Unit price) - Discounts - Rebates - Returns

The main component of revenue is the quantity sold multiplied by the price. For a utility company, it is the number of service hours multiplied by the billable service rate. For a retailer, it is the number of products sold multiplied by the selling price.

The obvious constraint on this formula is a company that has a diverse product line. For example, Apple might sell a MacBook, an iPhone, and an iPad, each priced differently. Therefore, the net revenue formula must be calculated for each product or service and then added together to get the total revenue for a business.

There are several components that reduce profit reported on a company's financial statements in accordance with accounting guidelines. Discounts on the offered price, bonuses granted to customers or product returns are subtracted from the total amount collected. Note that some components (ie discounts) only need to be subtracted if the unit price used in the previous part of the formula is the market price (not discount).

income example

Microsoft has a diverse product lineup that generates many types of revenue. The company defines its business in several different channels, including:

• Productivity and business processes: Office products (commercial and consumer), LinkedIn, Dynamics products
• Smart Cloud: Server Products and Cloud Services
• More personal computers: Windows OEM, Windows Commercial, Xbox, Surface.

As shown below, Microsoft reported $49.36 billion during the third quarter of 2022. High-level reporting requirements cause Microsoft's income statement to be shown between product and service revenue/other revenue.

In supplemental reports, Microsoft further clarifies revenue sources. For example, the split of the $49.36 billion in revenue earned during the third quarter of 2022 was split fairly evenly across the three product lines:

Revenue x Revenue/Profits

Many entities can report revenue and income/profit. These two terms are used to report different accumulations of numbers.

Revenue is generally the gross revenue collected by an entity. It is the measurement of the single component of revenue from an entity's operations. For a company, revenue is all the money it has earned.

Revenue/profit often incorporates other facets of a business. For example, net income or incorporated expenses such as cost of goods sold, operating expenses, taxes and interest expense. While revenue is a gross amount focused solely on revenue collection, revenue or profit incorporates other aspects of a business that inform net income.

Special Considerations

Revenue recognition: ASC 606

In 2016, the Financial Accounting Standards Board published Revenue from Contracts with Customers (Topic 606). The accounting standards update outlined new guidelines on how companies should report revenues. The guidance requires an entity to recognize revenue in accordance with five steps:

1. Identify the contract with the customer.
2. Identify the performance obligation in the contract.
3. Determine the contract price.
4. Allocate the transaction price to the performance obligation(s) of the contract.
5. Recognize revenue when the entity satisfies a performance obligation.

government revenue

In the case of the government, revenue is money received from taxes, fees, fines, intergovernmental donations or transfers, sales of titles, mineral or resource rights, and any sales made. Governments collect revenue from citizens within their district and collect from other government entities.

non profit income

For nonprofits, income is gross income. Its components include donations from individuals, foundations and corporations, grants from government entities, investments and/or membership fees. Non-profit income can be earned through fundraising events or unsolicited donations.

real estate income

In terms of real estate investments, yields refer to the income generated by a property such as rent or parking or rent. When operating expenses incurred in operating the property are subtracted from the property's income, the resulting amount isOperating margin(I AM NOT). Technically, vacant properties do not generate any operating income, although the property owner may be required to report fair market value adjustments that result in earnings when externally reporting their finances.