What is sales revenue on a balance sheet?

The balance sheet is one of your company's basic financial statements. It's an equation with the total company assets on one side and debts and owners' equity on the other side. Equity is what's left after subtracting all the debt from the assets. Sales revenue isn't an entry on the balance sheet, but it does have an effect.

Assets

1. Sales affects the balance sheet because sales generate revenue and revenue increases the company's assets. If your customer pays when you close the sale, the money goes into the cash account on the assets side of the balance sheet -- the current assets subsection, specifically. If you close the sale on credit, the money your customer owes you gets recorded in current assets under accounts receivable. When a customer pays up, you debit accounts receivable and credit cash to reflect the payment.

Retained Earnings

1. When your current assets increase, the balance sheet has to increase owner equity as well. The added income usually goes in retained earnings. Down the road your company can use the retained earnings to buy more assets or pay down debt. These options make further changes to the balance sheet.

Bad Debts

1. Sending your customer a bill doesn't guarantee he'll pay. If it becomes obvious you're not getting the money, you report this on the income statement as a bad-debt expense. You record it on the balance sheet as a reduction to accounts receivable. If you have $13,000 in accounts receivable for unpaid sales and a customer defaults on a $2,500 bill, you subtract that amount from accounts receivable leaving $10,500. You make the same reduction to retained earnings.

Current Assets

1. Your cash account and other current assets can help you measure the health of your company. Divide current assets by the current liabilities entry on the other side of the balance sheet: They should be roughly equal. If current assets are only a small percentage of current liabilities, it implies you don't have enough liquid assets to cope with a sudden crunch. Another approach is to subtract current liabilities from current assets to show your total working capital.

Sales revenue and revenue are terms often used interchangeably. But the definition of sales revenue is the revenue that comes from sales of product and services, while revenue includes income generated from things not directly related to the core business, such as income generated from interest on savings or cash paid out by dividends. This is classified as non-operating income.

Key Takeaways

Eighty percent of CFOs said KPIs related to revenue, income and sales growth were the most important in Brainyard ‘s State of the CFO survey. Accurately tracking sales revenue is the foundation of the income statement and is the key determinate of profitability for the business. It is also an essential component when calculating other important KPIs as well—KPIs like Days Sales Outstanding (DSO), Customer Lifetime Value (CLV) to name a few.

The benefit of sales revenue is that it points to the success and profitability of a company’s core business. Indirect revenue in many cases is a result of one-time events that have no bearing on the long-term sustainability of the business. It is not a key indicator for business leaders, financers or investors on how successful and profitable the company’s core products and services are.

Sales revenue is recognized on the income statement for the month in which the product or service was delivered or fulfilled, according to generally accepted accounting principles (GAAP) and the recent pronouncements by the Accounting Standards Codification and International Financial Reporting Standards that specifically addressed the rules for revenue recognition. For example, say online retailer Roosevelt’s Bears and Accessories sold 40 teddy bears in June for $25 a bear and collected $1,000 in receipts. But it delivered only 20 of them in June. It can only recognize revenue for those 20 bears, making recognized sales revenue for June $500 and the remaining $500 of unfulfilled orders gets recorded to deferred revenue.

Additionally, say customers returned four bears sold in May. That $100 is subtracted from the sales revenue making the net recognized revenue for June: $400.

Revenue vs. Sales Revenue—How Do They Differ?

In the previous example, revenue from teddy bear sales is considered direct sales revenue. But let’s also say that the company has cash in the bank that earned an additional $100 in interest during this accounting period.

In this example, sales revenue is everything earned from the sale of the bears. This is the top line of the income statement. But the company actually earned revenue from activities not related to its core business—the money generated from interest. This is also revenue, but it is non-operating or indirect revenue. In a multi-step income statement, non-operating revenue does not count toward gross revenue. It is recognized after sales revenue, costs of goods sold and operating expenses in calculating the bottom line.

Why Is Sales Revenue Important?

By accurately calculating and recognizing sales revenue, the business can:

Measure profitability.

Businesses need sales revenue to measure the profitability of core business activities.

Decide where to invest.

Breaking out sales revenue by product category helps businesses see which items or categories are performing and which are struggling. The company can then adjust its strategy accordingly. For example, it could increase the next month’s production plan to meet demand for faster moving products.

Determine whether it’s eligible for certain loans or contracts.

Some loans and opportunities to compete for government contracts are only available to businesses under a certain revenue threshold.

Determine valuation.

In some industries, especially in software, revenue is a big factor in calculating valuations because it can signal growth or an increase in market share.

What Does Sales Revenue Include?

Sales revenue includes all sales of products and services but does not necessarily count those sales in real time. Using our example above, Roosevelt’s sold and received payment for 40 bears in June at $25 a bear for a total of $1,000. Let’s say Roosevelt also mended five bears at a cost of $20 a bear. Customers paid for those mended bears, but they will not be returned to customers until July. Under accrual basis accounting, sales for services of those five bears cannot be counted on June’s books. That revenue must be recognized when the bear is delivered to the customer. This is called deferred revenue.

Sales revenue does not include the cost of goods sold (COGS)—the costs associated with the materials, labor and manufacturing of the bears themselves. It also does not include income earned on activities that are not related to the company’s core business of making and mending bears.

Sales Revenue Formula

Sales revenue is calculated by multiplying the number of products or services sold by the price per unit.

Sales Revenue = Units Sold x Sales Price

How to Calculate Sales Revenue and Example

Sticking with the example of Roosevelt’s Bears and Accessories, sales revenue is calculated as:

Product revenue: 40 Bears x $25 = $1,000

Services revenue: 5 Bears Mended x $20 = $100

Sales revenue is the amount realized by a business from the sale of goods or services. The two words can be used interchangeably, since they mean the same thing. This figure is used to define the size of a business. The concept can be broken down into two variations, which are noted below.

Gross Sales Revenue

Gross sales revenue includes all receipts and billings from the sale of goods or services; it does not include any subtractions for sales returns and allowances. It is reported at the top of the income statement.

Net Sales Revenue

Net sales revenue subtracts sales returns and allowances from the gross sales revenue figure. This variation better represents the amount of cash that a business receives from its customers, especially when it is experiencing substantial amounts of returns.

Reporting of Sales Revenue

Sales revenue is typically reported for a standard period of time, such as a month, quarter, or year, though other non-standard intervals can be used.

How to Evaluate Sales Revenue

The key figure against which sales revenue is compared is net profits, so that the analyst can see the percentage of sales revenue that is being converted into profits. This net profit percentage is usually tracked on a trend line, to see if there are any material changes in performance. Investors also like to track sales revenue on a trend line, and especially the percentage rate of growth, to see if there is any evidence of changes in the growth rate. A declining growth rate may trigger a sell-off among shareholders.

Terms Similar to Sales Revenue

Sales revenue is also known as sales or revenue.