Differences Between Assets and Revenue

Assets and revenue are very different things. For one, they appear on completely different parts of a company's financial statements. Assets are listed on the balance sheet, and revenue is shown on a company's income statement.

The differences only grow from there. Here's the full explanation of what assets and revenue are, and their differences.

What are assets?

Assets are anything a company owns, and they are listed in groups on a company's balance sheet. Below, I've cut out the asset portion of Wal-Mart 's balance sheet so you can see the types of resources that are considered assets to a company. Assets can be both tangible and intangible.

Assets are listed in order of liquidity -- or how easily the asset can be turned into cash. Notice that Wal-Mart lists its cash and cash equivalents on its balance sheet first. This line includes cash in the bank, and investments that mature in three months or less. Being cash, or cash-like, it's only natural that this appears first on the balance sheet because cash and short-term investments are very liquid.

From there you'll see the following:

  • Receivables: Money that Wal-Mart is owed by other companies. This includes money that it expects to receive from insurance companies for pharmacy sales, cash due from banks for credit and debit card sales, or payments due from suppliers, among other things.
  • Inventories: This is pretty straightforward. The products that Wal-Mart owns on its store shelves and in its distribution centers that it holds to sell to its customers is listed here.
  • Prepaid expenses: When a company pays for an expense in advance (several months of rent or insurance premiums paid in advance) the portion of the payment that covers future periods is held as an asset. The amount will decline as the prepaid amounts shrink.
  • Property and equipment: Wal-Mart is a massive retail company that operates thousands of stores and distribution centers. The land and buildings it owns make up a portion of its property and equipment assets, but so do things like forklifts and trucks it uses to haul inventory across the country. Property under capital lease (assets it is slowly paying for through leases) is also carried on the balance sheet, with the amount reduced by how much it has paid toward the asset.
  • Goodwill and other: Finally, we have goodwill and other assets. Goodwill is an intangible asset. When a company acquires another company for more than its assets are worth, the remainder of the balance is allocated to "goodwill," which is effectively a placeholder for the value of customer relationships, brand names, and other intangible assets in excess of the value of the tangible assets. Intangible assets that have an infinite accounting life are typically held in the "other assets" section of the balance sheet.

What is revenue?

Revenue is listed at the top of a company's income statement. Revenue is what a company receives from the sale of products, usually adjusted for returns.

Wal-Mart, for instance, reports that its "revenue" is its "net sales." In this specific case, "net sales" is the amount of sales for a given period minus an amount for expected returns like shirts that don't fit, or blenders that don't work. Some companies also include an adjustment for damaged or lost inventory in their net sales figure. Because Wal-Mart owns Sam's Club, it also includes revenue it receives from memberships in its revenue.

Revenue is tangentially related to an asset. If Wal-Mart sells a prescription to a customer for $50, it might not receive the payment from the insurance company until one month later. However, it will report $50 in revenue and $50 as an asset (accounts receivable) on the balance sheet. It will also decrease the value of inventory for the amount it paid for the prescription it sold to the customer.

Similarly, if you buy a bag of oranges at Wal-Mart for $4 in cash, Wal-Mart's assets (cash) will go up by $4, inventory might go down by...say, $3 to reflect how much Wal-Mart paid for the oranges, and revenue will go up by $4 during the period to reflect that it sold $4 of oranges during the period.

The major difference

The single major difference between revenue (an income statement item) and assets (balance sheet items) is that revenue is recorded over the course of a period. For instance, Wal-Mart's fourth-quarter revenue will reflect everything it sold from Oct. 1 to Dec. 31.

However, assets are measured at a point in time. Thus, its balance sheet will show the assets it holds as of a single point in time -- what it owned on the day of December 31, the last day of the calendar fourth quarter.

Spending some time reading the income statements and balance sheets for a simple business like a retailer is a fantastic way to better understand the various financial statement accounts, what they mean, and how they interact. Wal-Mart's annual reports would be a great place to start.

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The article Differences Between Assets and Revenue originally appeared on Fool.com.

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