Accounting is the backbone of any business, as it guarantees sound financial health, which is essential for smooth operations. If you are new to accounting, two of the prime concepts that you need to understand, are gross and net revenue.
What is Revenue?
To put in simplest words, revenue is the income received by any company from sale of its goods or services. Revenue can also mean 'tax revenue', which is the money collected by the government as taxes. Broadly speaking, revenue is the income received by any financial entity in return for services offered or goods sold. In some countries, like the United Kingdom and India, revenue is known by the name of 'Turnover' of a company.
It is the incoming receipts generated as a result of goods sold or services provided. It is the prime parameter of consideration, when evaluating the financial health of a company. Revenue could be classified into two types - gross and net revenue. 'Gross' and 'Net' are two terms that you will come across a lot, when studying accounting.
Gross Vs. Net Revenue Comparison
Let us begin this comparison, by defining gross and net revenue at the start. After that, we are free to discuss the significance of these two terms, in terms of stock research and evaluation of overall business performance.
Gross revenue is the income generated by a company, through sale of goods, after adjusting for cost of goods sold (production costs), without any other kind of deductions taken into consideration. On the other hand, net revenue or net income is calculated by deducting taxes and all other expenses, from the gross revenue or income. In retail businesses, the income generated by a company through sales, minus all the commissions, maintenance expenses and refunds that it pays, is called net revenue. So if the expenses of a company in the form of commissions, depreciation and refunds, along with taxes are subtracted from gross revenue, all that you are left with is net revenue. In banking sector too, this term may be used with the same meaning. Some people use net revenue as a synonym for net profit. In that case too, it is the gross revenue minus all the expenses and taxation involved after sales.
Gross revenue is an important factor that gives you a rough idea about the sales volume of a company. Gross revenue or income doesn't clearly reflect the profitability of any company, as taxation and other expenses are not taken into consideration, while calculating it. However, it does reflect the efficiency with which human and material resources have been used.
Net revenue or net income, is the total profit generated by a business, after adjusting for expenses and taxation. It is colloquially referred to, as the 'bottom line', since it is placed at the bottom of a financial statement and is certainly the most important of all numbers displayed in there. Net income, declared quarterly, is the most important parameter for the investors, who are evaluating the past performance of a company, as a potential stock investment candidate.