You may hear people using the terms revenue and income interchangeably. In fact, you may use them interchangeably yourself. It is a common mistake, but the truth is that understanding the difference between revenue and income is key to monitoring the health of your business.
In the simplest terms, revenue is the total amount of money that a company brings in from selling goods or services. Income, on the other hand, generally refers to net income, and means the profit that the company earns after accounting for expenses. In order to calculate your net profit, you deduct operating expenses from your gross revenue. The other mistake that people often make is to assume that if a company has a high revenue, it must be doing well. The reality is that this might just mean that the company is good at sales and is selling numerous products. But, only a look at net income as well will provide the true picture - a company that is selling a lot but also has huge expenses is not going to be turning much of a profit.
As a business owner, it is crucial to understand the difference between revenue and income and the relationship between them. Armed with this information, you can best strategize your company’s plans for the future.
What is Revenue?
Revenue is also called the “top line” because it is the very first line item listed on a company’s income statement. It represents the total earnings received from sales before subtracting any expenses, and can also be referred to as gross sales. The term “top line growth” is used when a company sees an increase in its gross sales and indicates strength on the part of the sales and marketing teams. It does not, however, necessarily mean that the overall financial health of the company is strong.
What is Income?
Income, which actually refers to net income, is derived from subtracting all the costs of doing business from the gross revenue. What you are left with is what is known as the “bottom line”, as it is generally the last item on the income statement. The net income of a company is a good indicator of the overall financial health and profitability of the company.
Things can get confusing because income and revenue are sometimes used synonymously, but remember that revenue is the top line and income is the bottom line, representing revenue after expenses have been subtracted. These expenses can include things like the cost of goods sold, salaries and labor costs, rent, marketing costs, legal fees, office expenses and more.
Net income can be a negative number, if a company’s expenses have exceeded the revenues in a given time period. In this case, the company is said to be operating at a loss.
What Are the Types of Revenue?
What is considered revenue depends on the goals and activities of the specific company, but in general terms, types of revenue may include:
- Sales of physical goods
- Sales of services (i.e. consulting, personal training, etc.)
- Rent from a commercial property
- Sales of concert or other event tickets
- Interest earned from lending activities
What Are the Types of Income?
There are really only two main types of income:
- Gross income, which is really just revenue and is before expenses are deducted.
- Net income, which is how we are using the term “income” for the purposes of this article and refers to the amount left after deducting expenses.
Revenue vs. Income: What's the Difference?
It is important to have a handle on the difference between revenue and income because they are not interchangeable when it comes to financial reporting or understanding the status of a company. As explained above, revenue is the total amount of funds that a company earns from their main operating activities, be it selling goods or services, renting out property or any other business. Income, in comparison, is the total funds remaining after subtracting all expenses and associated costs from the revenue. Such expenses include cost of goods sold, marketing expenses, office supplies, rent and utility bills, salaries, taxes, legal and admin costs and technology expenses.
The following chart provides a summary of the major differences between the two terms:
Revenue vs. Net Income: Key Differences
- Revenue is a gross figure that includes all income, while net income accounts for expenses.
- Revenue is the first item on the income statement and from where the rest of the information on the statement is derived and used in order to get to the net income number, which is the last item on the statement.
- You need to know revenue in order to calculate the net income, while you do not need to know the net income in order to calculate gross revenue.
- The revenue number will always be larger than the net income number.
The following are examples to help illustrate the difference between net income and revenue:
Net Income Example
Jim sells picture frames online directly to customers who pay via credit card or other online payment methods. At the end of the year, Jim provides his accountant with all of his sales invoices totaling $150,000 as well as receipts for his expenses including what he paid employees, the supplies he had to buy, shipping costs and more totaling $25,000. The accountant processes all the information and tells Jim that his net income is $125,000 for the year.
Net income may also be listed on financial statements in one of the following ways:
- Net operating revenue
- Taxable income
- EBIT (earnings before interest and taxes)
- EBITDA (earnings before interest, taxes, depreciation and amortization)
Jessica runs an ecommerce site that sells novelty t-shirts, mugs and keychains. She offers a range of products at a variety of price points. At year-end, she adds up the total amount customers paid for each different product in order to calculate her revenue for the year.
Revenue can be made up of items such as:
- Total sales of goods or services
- Total billable hours
- Total licensing fees
- Total commissions
How to Calculate Revenue and Income
There are simple mathematical formulas that can be used to calculate both revenue and income. Of course, there are also plenty of software solutions that can be used to make these calculations automatically.
The gross revenue formula is:
Gross Revenue = number of units sold * price per unit
Net revenue is calculated using this equation:
Net Revenue = gross revenue - discounts - returns
And net income is calculated as follows:
Net income = revenue - cost of goods sold - other expenses
Real Examples of Differences Between Revenue and Income
Following are examples from two real companies - Apple and Walmart - to illustrate the difference between revenue and income.
In 2021, Apple’s total revenue was $365.8 billion, a 33.3% increase from the year before. That same year, Apple posted a net income of $94.7 billion, a 64.9% increase from the prior year.
Note that the net income is a lower number than the total revenue, which makes sense because net income is calculated by subtracting expenses from revenue. What is interesting here is that the total revenue is only 33.3% higher than the prior year, while net income is up almost 65%. The reason for this is that there are different explanations for both top-line and bottom-line growth.
Top-line growth - the growth in revenue - might be explained by the introduction of a new product that drove more sales or a strong advertising campaign. The bottom-line growth - that of net income - could be due to the increased revenues, but it might also be enhanced by things like cost-cutting or using a cheaper supplier.
In 2018, Walmart earned $515 billion in revenue, making it the world’s highest-earning company that year. Once all expenses were accounted for, the company’s net income was only $6.67 billion. This huge disparity between revenue and income illustrates just how important it is to differentiate between the two terms and how big of an impact costs can have on a company’s bottom line.
If Walmart based their future planning on their huge revenue number without taking into account their massive expenses, the results would likely have been disastrous!
What is the Difference Between Revenue and Income in Accounting?
While it does not necessarily have any material impact if one uses the terms revenue and income interchangeably in casual conversation, it is very important for accounting purposes to ensure they are defined correctly. Financial statements and reports as well as tax documents are critical pieces of information that must contain correct data. Accounting teams need to be sure to include all relevant revenue streams in the top line or total revenue. And there needs to be a clear understanding of all the different expenses that must be deducted in order to get to the bottom line. Any discrepancies and the wrong picture of the company’s health can be projected to customers, investors and the authorities.
Financial Statements & Reporting
Monthly financial statements and reports will give you a clear picture of how your business is doing. You need to be sure the information is accurate and that it is correctly reflecting the dynamic between revenue and income so that you can properly strategize and plan for the future and address any potential challenges.
The net income number does not include taxes - this is the number upon which your tax bill is calculated. To prevent being audited, it is crucial to ensure that your numbers are accurate and that all revenue and income is calculated correctly.
What is the Difference Between Gross Revenue and Net Revenue?
It is worth mentioning that there is a difference between gross revenue and net revenue. The revenue that we have been talking about in this article can also be called gross revenue, as it refers to the total (or gross) amount of money received from business operations. Net revenue accounts for adjustments that are not necessarily expenses, like discounts and returns.
Which is more Profitable - Revenue or Income?
It is very important to remember that revenue is NOT profit. Sure, revenue is the money you receive for selling your products, but until you subtract expenses, you do not know what your profit will be. Net income, by definition, is profit as that is your “take-home pay” after you have paid out any expenses.