Definition: The total amount of money that customers have paid (or agreed to pay) for the products and services a company has provided in a given period. This dollar amount is shown on the top line of the company’s periodic Income Statements. It is often interchanged with the term Revenue.Example: In the quarter of the year just ended, Sellco Corporation delivered (and installed) $5 million worth of computers. The company received $4 million from customers for the computers. Customers who received the other $1 million of computers acknowledge that they are all installed and working properly. They agree to pay for them in the near future. The company may state that it achieved sales of $5 million in the quarter.
Investeach explains: The above situation describes “accrual” accounting in action. This type of accounting allows a company to record a sale as having taken place when it has done everything that was required in its agreement with the customer. The timing is payment is irrelevant. The point is that the company has done its job and the money is now owed to it by the customer.
For simplicity’s sake (but at the expense of accuracy), when computing income taxes the IRS allows some very small private companies to use “cash basis” accounting. Under this method, a sale is considered as having taken place only when cash is actually received.
The term Revenue has historically been defined as all the money taken in over a given period of time. For example, the IRS doesn’t sell anything, yet it takes in a lot of money. With IRS standing for Internal Revenue Service, we see that R is for the word Revenue. How could a company’s Sales be different than Revenue? Let’s say that a company has $1 million in sales and, however unlikely, a loyal customer donates $100,000 to the company for doing such as a great job. We could argue that Sales were $1 million and Revenues $1.1 million.
However, we’re missing a larger point. If we look at how major financial web sites such as Yahoo, Microsoft and Google present company Income Statements, we see that they all label the first line Revenue. Yet, earlier we stated that all but the smallest companies must use accrual accounting, meaning that Sales are not measured by how much cash was taken in (which is the traditional definition of Revenue), but rather when money is owned to the company. We’ve got either one of two situations here: these sites are using the wrong term or they have chosen to forget the traditional meaning of Revenue and are use it as another term for Sales.
Finally, to be cool, financial experts, when asked to comment on a company’s performance will often say something about how the company’s “top line” grew. They say this because Sales are shown on the top line of the Income Statement. Therefore, “top line” is financial expert talk for Sales.
Riddle me this:
1. Under accrual basis, when can a company consider a sale as having taken place?
2. What other, more simple method of accounting for sales may be available to very small private companies?
3. How do Sales differ from Revenue (as that term was traditionally defined)?
4. How do we know by seeing how the first line of company Income Statements are labelled on financial web sites that the meaning of the term Revenue has changed?
5. What is a slang term for Sales that financial experts like to use?
Also known as: Top line