What Are the Different Types of Revenue?
Revenue refers to the income a business generates from its normal operations. It is the gross or top-line income figure from which expenses are subtracted to calculate net income. A business’s revenue is split into two main types: operating and non-operating. Operating revenue is derived from sales and services; in other words, it’s the money a business earns from its core activities. Non-operating revenue can be seen as income on the side, or passive income. It refers to the money a business earns from activities outside its core offerings. When a business earns revenue, the first thing to do is to properly record it in the accounting books. This was historically a manual task with pen and paper, but modern accounting software now automates a business’s record-keeping functions and reconciliations.
Operating Revenue
Separating operating revenue from a business’s total revenue is important, as it gives insight into the profitability and productivity of the business’s primary operations. Even though financial statements should list operating revenue separately, some companies attempt to hide operating revenue decreases by combining them with non-operating revenue on these statements. Understanding the sources of a business’s revenue is important when assessing the overall health of a business and its operations.
Examples of Operating Revenue Accounts
Sales of goods or services are examples of operating revenues. Let’s say you have a landscaping company; your business’s operating revenue will come from the services you provide. Similarly, if you own a grocery store, the sale of groceries will be your operating income.
Non-Operating Revenue
There are times when a business earns a one-off income amount from an investment or the sale of equipment or a piece of property. This would be classified as non-operating revenue and can alter a business’s earnings significantly, making it difficult for investors to determine how well the company’s main business line actually fared during a specific period. This is why businesses are required to disclose non-operating revenue separately from operating income, and it plays an important role in evaluating a business’s real performance.
Examples of Non-Operating Revenue Accounts
A good example of non-operating revenue is a retail store that sells merchandise. If the store decides to invest $100,000 in the stock market and earns 6% in capital gains, the amount of $6,000 would be seen as non-operating income. Other types of non-operating revenue accounts include:
Rent Interest Foreign-exchange transactions Dividend income Royalties Contra revenue, such as sales allowances, discounts, and returns
Operating revenue is a very important metric when assessing a business’s operational efficiency, and it helps shareholders and potential investors to assess how profitable a business is. In contrast, non-operating revenue tends to show one-time income and expenses that do not form part of a business’s core functions. The ability to accurately report on both is essential when compiling income statements and capturing an accurate overview of a business’s performance.
