Explicit & Implicit Revenue in Economics

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In business, revenue is the total amount of money that a company receives for selling its goods or providing its services to customers during a given period of time. This also includes all net sales; exchange of assets; interest, dividends or royalties paid by other companies and any other income that increases the owner’s equity. There are two types of revenues: explicit and implicit revenue.

Explicit Revenue

This type of revenue is a gain by a company or an individual which can be easily determined. This revenue is from tangible things immediately seen and recorded by an accountant. It increases during the business’ performance and can be directly estimated by putting the formula of the price of product multiplied by the quantity of goods equals the total income from sales. This means that if the company gains explicit revenue, the price or quantity of the product has increased.

Implicit Revenue

This type of revenue is gained by the increases in the value of the assets which cannot be immediately seen and recorded. Implicit revenue is income not derived from operations such as manufacturing. Other implicit revenue is the income derived from non-monetary activities: such as the revenue received from starting a business at the expense of dropping out of college.

Financial Statement Analysis

Revenue is an important part of financial statement analysis. This process helps to understand the risk and profitability of a business through analysis of reported financial information, mainly annual and quarterly reports. A company’s achievement is measured by comparing its revenues (asset inflows) with its expenses (asset outflows). That is why revenues are estimated before any expenses are deducted. The result of this equation is net income that can be held by the company as retained earnings or distributed among shareholders. Revenue is used to indicate the quality of the earnings. There are several financial ratios that add to it. The most important are gross margin and profit margin. Also, revenues are used by companies to determine bad debt expense using the income statement method.

Economic Profit

An economic profit is estimated by the total of revenues (explicit and implicit) minus the total of the costs (explicit and implicit). Implicit costs are those costs arising from the owner or supplied resources such as time and capital. Economic profit is used as a manual in deciding if resources or owners should enter, stay or leave a market.

Accountant Profit

An accountant profit is estimated by the explicit revenues (merchandise sales/fees earned) minus the explicit costs, which are expenses incurred in earning that revenue for the given accounting period. This profit is the most used by the business community, usually accepted in accounting principles and government agencies under income tax and corporate law.