Gross Revenue vs. Net Revenue Reporting: An Overview
Recognizing and reporting revenue are critical and complex problems for accountants. Many investors also report their income, and the difference between net and gross revenue for a small business can have significant income tax repercussions if mishandled. There are many gray areas in both recognition and reporting, but ultimately, all earned income from sales transactions falls into gross or net categories.
Key Takeaways
- Recognizing and reporting revenue are critical and complex problems for accountants.
- How revenue is recorded and reported is also important for investors and financial analysts.
- When gross revenue is recorded, all income from a sale is accounted for on the income statement. There is no consideration for any expenditures from any source.
- Net revenue reporting is instead calculated by subtracting the costof goods sold from gross revenue, providing a more accurate picture of the bottom line.
Gross Revenue Reporting
When gross revenue (also known as gross sales) is recorded, all income from a sale is accounted for on the income statement. There is no consideration for any expenditures from any source.
For example, gross revenue reporting does not include the cost of goods sold (COGS) or any other deductions—it looks only at the money earned from sales. So, if a shoemaker sold a pair of shoes for $100, the gross revenue would be $100, even though the shoes cost $40 to make.
Standardized gross vs. net revenue reporting guidelines under generally accepted accounting principles (GAAP) were addressed by the Emerging Issues Task Force in 1999. This was later superseded by Accounting Standards Update No. 2014-09 (Topic 606), issued by the Financial Accounting Standards Board (FASB).
Net Revenue Reporting
Net revenue (or net sales) subtracts any discounts or allowances from gross revenue. For the same shoemaker, the net revenue for the $100 pair of shoes they sold, which allowed retailers to sell at a 40% discount to clear inventories, would be $60. From that $60, they may additionally deduct other costs such as rent, wages for staff, packaging, and so on. Anything that comes as a cost to the shoemaker would be deducted from the gross revenue of $100, resulting in the net revenue.
Net revenue is usually reported when there is a commission that needs to be recognized, when a supplier receives some of the sales revenue, or when one party provides customers for another party.
Investors and traders will use their net revenue to calculate their capital gains tax liability for the year; it is usually as simple as subtracting the yearly loss from gains and being taxed on the remainder.
Special Considerations
Whether a company can recognize revenue as gross or net depends on whether they are the principal or agent in selling a good or service. To help accountants determine this, the FASB created five criteria:
- Identify the contract with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognize revenue when the reporting organization satisfies a performance obligation.
These steps help accountants recognize revenue as either gross or net by identifying each party's performance obligation and their control of the good or service. The entity that provides and controls the goods or services is called the principal. If an entity arranges for another party to provide goods or services, the arranging entity is called an agent.
Determining which party is the principal and agent for revenue purposes is a complex process, and is the main reason ASC 606 was designed and implemented.
The principal in this relationship can claim revenue as gross, while the agent must claim revenue as net.
Gross Revenue vs. Net Revenue Example
The type of revenue that can be claimed depends on a party's control and the definition of its performance obligations. For example, assume that Company A manufactures wrenches. It controls the production costs, assumes the inventory and the credit risk in its operations, and can choose its suppliers and set prices. It uses Company B to sell its wrenches.
Company B is an online store that presents different suppliers' goods to potential customers, and the Company B website has a disclaimer that it is not responsible for the shipping or quality of the products received by customers. In this case, Company B is an agent and reports any revenue from the wrenches as net. Company A maintains control of the wrenches and is the principal.
However, if Company B were to purchase the wrenches from Company A and then sell them, it gains control of the wrenches, becoming the principal. It could then recognize revenue from the wrenches as gross.
Does Gross Revenue Mean Profit?
Gross revenue is the dollar value of the total sales made by a company in one period before deduction expenses. This means it is not the same as profit because profit is what is left after all expenses are accounted for.
Is Net Revenue the Same As Profit?
Net revenue is the dollar value of the total sales made by a company after certain expenses are deducted. There are likely other expenses not tied to revenue to account for, so net revenue is not the same as profit.
Does Revenue Mean Gross or Net?
Revenue means money from sales and usually refers to the dollar value of gross sales. Gross sales is another name for gross revenue, so revenue is generally used to refer to gross revenue.
The Bottom Line
Gross revenue is the total dollar amount gained from sales. Net revenue is the total dollar amount gained from sales after accounting for revenue expenses, which are usually operational in nature.
Gross revenue should be reported by businesses that are the principal, have inventory at risk, establish the price for goods, and other originating company responsibilities. Net revenue is generally reported by firms that do not meet these requirements.
