One of the ongoing accounting activities a business needs to practice is tracking earnings. Keeping a record of income is not a difficult task by itself, but accounting for different types of income from various sources makes the process more complex. One important distinction is the difference between gross sales and revenue, which are both tied to income but based on very different measurements.
In financial accounting, revenue refers to all the money a business takes in through normal operations. All sales are part of revenue, whether they come from goods or services the business offers to its customers. Other common sources of revenue include interest and dividends from investments a business holds. Royalties and licensing payments for use of trademarks and patents are also part of the revenue a business must account for each fiscal quarter and year.
Gross sales are only one component of revenue. They consist of all the money a company earns through sales, either directly to customers or to retailers. Gross sales is the most broad classification of sales, though not as broad a measurement of income as revenue. Accountants use gross sales to calculate other data for completing financial reports; gross sales themselves do not appear there. Several factors affect revenue that don't alter gross sales, including investment income.
Calculating total revenue is a matter of adding up income from all sources. Cash-flow statements and income statements both list information analysts can use to calculate total revenue. Calculating gross sales is a similar process, though with fewer sources of income. However, gross sales figures are useful in determining net sales. Net sales are gross sales minus the value of any discounts or returns that reduce how much a business makes from a transaction.
Revenue is important to business leaders and investors because it demonstrates a company's ability to bring in money. Gross sales is a less useful figure since it neither accounts for all sources of income, as revenue does, nor specifies how much the company ultimately makes by selling goods and services, which is what net sales refers to. Net sales appear on financial reports and are a more useful measure of performance than gross sales.
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