Sales Revenue

The starting point of the income statement

What is sales revenue?

Sales revenue is the revenue received from the sale of goods or the provision of services. It is important to note that revenue does not necessarily mean cash received. A portion of sales revenue may be paid in cash and a portion may be paid on credit, through terms such as accounts receivables.

Sales revenue can be listed on the income statement as either the gross revenue amount, or net revenue. Net revenue includes all deductions for the return of goods, the possibility of undeliverable merchandise and the expense for unrecoverable accounts receivables (also known as bad debt expense, which flows into balance sheet as the allowance for doubtful accounts). Gross revenue, on the other hand, does not include these deductions. The gross revenue presentation will have the deductions below gross revenue, and a subtotal for net revenue below that.

Sales revenue and the income statement

The very first line of the income statement is sales revenue. This is important for two reasons. Firstly, it begins the starting point for arriving at net income. From sales revenue, cost of goods sold is deducted to find gross profit. Depreciation and SG&A expenses are deducted from gross profit to find the operating margin, also known as EBIT. EBIT less interest expense is pre-tax income, and pre-tax income less taxes is net income.

Secondly, as the first item of the income statement, sales revenue is an important line item in the top-down approach of forecasting the income statement. The historic trend of sales revenue is analyzed, and sales revenue for future periods are forecasted. From there, all expenses below sales revenue are often found as percentages of that revenue. As the first item, it becomes the pivot or anchor from which other line items can be forecasted. This is also one of the reasons why sales revenue is known as the “topline”.