Knowing how much a company made from selling its products or services is the first step in determining how successful it was during a certain period of time, such as a month, a quarter or a year. A company’s income statement begins with revenue, which is basically all the income you received. Net revenue is not the same as gross revenue, however, since you'll need to deduct any discounts, commissions and other direct selling expenses.
TL;DR (Too Long; Didn't Read)
Calculate the net revenue by adding up all the sales that a company recorded and then subtracting direct selling expenses, like commissions, discounts and returns.
Choose an Accounting Method
Revenue is recorded when a product is sold or a service is provided. But the exact timing, and thus the amount of revenue listed on an income statement, depends on a company’s accounting method. If a business uses cash accounting, revenue is recognized when a product or service is paid for, which may be after it is sold. With the accrual method, revenues are recorded when a sale is made, and so are the associated expenses. U.S. companies typically use accrual-based accounting, in accordance with generally accepted accounting principles (GAAP).
How to Calculate Gross Revenue
Add all income generated from company sales during the time covered by the income statement to get gross revenue. For example, if a company sells 100 products at $100 apiece during any given month, its gross revenue for that month is $10,000.
How to Calculate Selling Expenses
Add all expenses directly associated with the sales that were made to get the cost of goods sold. Commissions, discounts and returns are common selling expenses. Though a company typically would try to limit returns of sold items so that it wouldn’t lose revenue that it had recorded, it might increase the commissions it offers to salespeople or the discounts it offers to customers in order to generate more sales, thereby increasing its gross revenue.
If a salesperson received a commission of $5 for each of the 100 products that were sold, then there would be $500 in selling expenses, for example. If 50 of the products were discounted by $10, then there would be an additional $500 selling expenses. And, if two products were returned at $100 apiece, then there would be another $200 in selling expenses. The total selling expenses would be $1,200.
How to Calculate Net Revenue
Subtracting the selling expenses from gross revenue provides the net revenue. So, subtracting $1,200 in direct selling expenses from $10,000 in gross revenue results in net revenue of $8,800 for the month covered by the company’s income statement.
- QuickBooks: Understanding Your Top and Bottom Line - The Difference Between Net Revenue and Net Income
- Patriot Software: Net Revenue and Discounts
- Investopedia: How Do Companies Calculate Revenue?; Chizoba Morah
- Investopedia: What are the Differences Between Gross Revenue Reporting and Net Revenue Reporting?
- The American Association of Individual Investors: The Income Statement - From Net Revenue to Net Income; Joe Lan, CFA
Jim Molis has more than 20 years of experience writing for and about businesses. He has been a business reporter for the Columbus (Ga.) Ledger-Enquirer, a managing editor of the Atlanta Business Chronicle and an editor of the Jacksonville Business Journal. He also has written for management consultants, professional services firms and numerous publications as a freelancer.