The Difference Between Revenue and Income
Accounting Terminology for Sales and Profit
When reviewing a financial statement, revenue and income are terms that seem similar but very different meanings. Revenue equates to the total amount generated, while income is what is left after expenses. Not being aware of the terms used can lead to mistaken conclusions.
Definition of Revenue
The top line on an income statement is revenue. This is the total amount of sales that a company has for the period covered by the statement. This amount may stand alone, or may be reduced by sales returns and allowances.
It is important to know how much money is being generated from sales, but it is only half the picture. The next step is to know how much goes out, and how much is left.
Net Income
In accounting terms, income is the amount left after expenses have been subtracted from revenue. If expenses are greater than revenue, a business is said to have a net loss. Net income is another way of saying profit, or gain. This is the bottom line.
For example:
- If a company sells $10,000 worth of items in a month, and the cost for those items is $8,000, net income is $2,000.
- If revenue is $10,000, and total expenses are $13,000, there is a net loss of $3,000.
Expenses include expected items such as salaries, supplies and rent, but also depreciation and bad debts. Depreciation is the amount of large expenses such as buildings and equipment (known as capital items) which is spread over several years.
Cash Flow in Business
Another easily misunderstood term is cash flow. The term generally means revenue less all expenses except depreciation. Depreciation is a non-cash expense; therefore it is added back to income to calculate how much real cash is being generated by the business.
Capital items impact cash flow only in the year that they are purchased. It is vital for a business to generate enough cash flow to replace capital items when they wear out.
Revenue versus Income in Infomercials
Often in infomercials, someone may make seemingly outrageous claims, such as generating hundreds of thousands of dollars in revenue. The claim may actually be true, but misleading to those that do not understand the terms.
There may be $200,000 in sales, but if expenses are $250,000, the person is really generating a loss. The income, which is what the viewer is mainly interested in, may be small or negative.
They are not taking the money home, but actually are putting more into the business than they are taking out. The infomercial is factually accurate, but can be misleading without a good understanding of accounting terminology.
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