Before getting into the specifics of the gross revenue vs net revenue discussion, it is important to understand precisely what revenue is.
By definition, revenue is the money generated during a business’s routine operation.
This means that all the money generated while the business continues to run daily is what is known as revenue. It is not simply the money accumulated in daily sales; revenue is calculated using a specific formula.
The proper way to calculate a business’s revenue over time is as the average pricing, which is then multiplied by the number of items sold during that time.
Keeping this information in mind, it is important to understand that revenue is an umbrella of different terms, under which come gross and net revenue.
Let us discuss this in a bit more detail, understanding what gross and net revenue are and also exploring in a bit more detail how you can differentiate between the two as well.
What is Gross Revenue?
When talking about revenue and its overall calculation, gross and net revenue are some things that need to be considered as they are an essential part of the process.
For a company to properly evaluate how they are faring financially, they need to calculate its revenue so that they know its financial situation and can proceed accordingly.
The primary purpose of calculating gross revenue is to display the company’s overall value. Furthermore, this type of revenue is also something that largely contributes to the calculation of other metrics as well.
Definitively speaking, gross revenue is known as the amount of revenue that a company has accumulated during a specific period, and that period is usually a year.
Gross revenue is also mentioned in the organization’s income statement, and due to its position on the statement, it is known as the ‘top line’ as well.
Another fact about gross revenue is that the money which has been calculated as this type of revenue is used to define the capital which that organization has purely earned through an enterprise, which is why gross income does not take expenditures such as overhead and the costs of the goods being sold into account.
Many companies consider gross revenue a vital financial metric for their company income evaluation primarily because it is a great measurement that is especially useful when it comes to displaying the company value to the external shareholders of the company.
What is Net Revenue?
Not only gross revenue, but another term that is just as important and comes under the umbrella of financial terms covered is the net revenue that an organization generates.
This nature of revenue is the one that defines the amount of income that a company earns in a specific time, which is calculated after taking all of the possible discounts into account.
How it works is that many brands promote their products by adding limited-time discounts and promos to increase their reach and help attract a wider audience.
Furthermore, these discounts encourage more consumers to invest in their products, and this concept of purchaser discounts is especially prevalent in the retail industry.
When companies offer these discounts, they appear in the income statement as a reduction from their overall revenue, known as net revenues.
Gross Revenue vs Net Revenue: The Difference
Although due to how both of these revenues work, they may look similar, they are very distinct. Because of their role in tracking any company’s income streams, they are essential in tracking their financial progress through the fiscal year.
The difference between these two types of revenues is mainly prevalent when taking the company’s overall expenses into account, which include the cost goods are sold at, as well as other expenses and fixed costs which include factors such as overhead pricing.
Let us discuss this in greater detail, highlighting some of the other aspects where gross and net revenue differs:
- Cost of the goods being sold. The pricing at which goods are sold is the cost the organization or company comes up with after considering the manufacturing.
- Marketing. This includes the different costs involved in the overall marketing of the product and includes factors such as the costs for advertising and other costs which are invested into the company for product marketing.
- Taxes. This includes various payroll taxes, sales, and income taxes, all deducted from the overall revenue to come to the net revenue.
- Technology. This includes any costs the company has incurred in the form of licensing, possible subscriptions and software acquisition.
- Legal Fees. Whether it is due to licensing issues, or a possible breach of contract, there may be times when a company would have to pay their lawyers or consultants, and the amount of money paid to them comes under legal fees and usually comes out of the net revenue.
- Employee Compensation. Many companies offer employees the option to invest in a provident fund, and some even offer retirement benefits. The capital which is spent on this is known as employee compensation.
Gross and Net Revenue Reporting
A major part of the job for accountants is to analyze and report all of the earnings and inform the company of its financial position by reporting the calculated revenue to them.
Accounting and preparing relevant revenue reports are crucial parts of the job because, if handled incorrectly, they could lead to severe tax-related repercussions and financial loss in the long run.
Although the accounting departments need to consider many variables within the income stream, almost all of a company either falls into the gross revenue or the net revenue report.
Let us explore these reports in greater detail, understanding what both consist of and discussing how they possibly differ from each other.
Gross Revenue Reporting
When accountants are in the progress of reporting the company’s gross revenue, no expenditure is considered at this point, with the entirety of the income generated from sales to be taken into account and added onto the resulting income statement.
Furthermore, when reporting this type of income, the cost of goods sold, also known as COG, is not included in the report, so only the finances earned from product sales are used.
An example of this is if someone sells a product for $200, which is the amount that will be the gross revenue and will be used during the process of gross revenue reporting, regardless of what is put into the product’s manufacturing.
Net Revenue Reporting
Unlike gross revenue, net revenue reporting considers a couple of factors, requiring accountants to perform several calculations accordingly.
When calculating the net revenue for their report, they have to subtract any discounts the organization has applied to their products.
Furthermore, another thing to note is that these subtractions are done from the gross revenue since the revenue does not include any expenditure.
Further extending the previously used example, the same product, which was sold for $200, went through a 40% discount, which resulted in increased sales of that product.
When formulating the net revenue report, the accountants would then have to deduct that discount, and further deductions in the form of rent and packaging would also have to be taken into account.
Net revenue reporting is not a usual practice in many organizations, and this sort of report is usually generated when there is a commission that needs to be considered.
In addition, another case where net revenue reporting comes into play is when the supplier is also required to receive a portion of the sales.
Conclusion
This was simply a condensed guide that touched on many points centered on the net and gross revenue concept.
In addition to exploring what is involved in the calculation and recording of these two types of revenue, we looked at the differences which distinguished them, highlighting the reporting which needs to be done in both net and gross revenue.
When stepping into accountancy, all of these terms seem overwhelming. However, following this guide will surely set you on the right path and significantly accelerate your adapting to this.
