INTRODUCTION• The purpose of business is to earn a profit from the sale of products (revenue). These products may be tangible in nature (i.e. goods) or intangible (i.e. services). Profit is the money left over after deducting from the gross sales of these products, the cost of the activities required to generate those sales (expenses). So a business generates revenue when it exchanges its goods or services with its customers in return for money or other assets.
Now, in the 500 years of applied accounting,the terminology of revenue has evolved intonames often labeled as turnover, Top line,sales, gross receipts, fees earned or evenincome. Unfortunately the term income alsohas a use in some circumstances of meaningprofit (i.e. after expenses have beendeducted) and can be confusing for some
Definitions of revenue• “Revenues or revenue in business is the gross income received by an entity from its normal business activities before any expenses have been deducted. Income may be received as cash or cash equivalent and is typically generated from the sale of goods or the rendering of services for a particular period of time.”
“The amount of money that a company actuallyreceives during a specific period, including discountsand deductions for returned merchandise. It is the"top line" or "gross income" figure from which costs are subtracted to determine net income."• From the business point of view revenue can be understood as a gross increase in owners’ capital resulting from the operations of a businessThe price of goods sold and services rendered during a given accounting period .
Other Revenue• Revenue that a company derives from any source other than its operations. For example, if a company sells one of its factories or receives income from interest payments, it is considered other revenue. Most (though not all) other revenue is non-repetitive and, as such, is excluded from many calculations of profit.
Net revenue• Net revenue describes the gross revenue minus any product returns, allowances and any discounts for the early payment of invoices.
Types of revenue in accounting. Sale of goods Other(sal es of Services assets Revenue provided etc) Lending fees and investment s
Main features revenue arises from the normal trading activities of a business revenue eventually creates an inflow of funds into the business revenue is measured in monetary terms
Main features revenue must be allocated to a particular accounting period revenue is earned as a result of revenue generating activities typically expressed as expenses
Sources of Revenue Revenue IndirectDirect sources sourcese.g sales of e.ggoods or interest,dividenservices d,commision orrendered discount received.
WHY REVENUE INCREASES ASSETS AND OWNER EQUITY??• The inflow of cash and receivables from customers increases the total assets of the company; on the other side of equation liabilities do not change but owner’s equity change to match the increase in total assets. Thus revenue increases both assets and owner’s equity.
PrinciplesRevenue Recognition Principle Revenue recognition principle dictates that companies recognize revenue in the accounting period in which it is earned. In a service enterprise, revenue is considered to be earned at the time the service is performed.
Revenue recognition for service companies In a service company, revenue is consider to be earned at the time the service is performed.Revenue recognition for merchandisers If a company is a seller of goods, revenue is earned when the goods are delivered
Matching Principle The matching principle is one of the cornerstones of the accrual basis of accounting. Under the matching principle, when you record revenue, you should also record at the same time any expenses directly related to the revenue. Thus, if there is a cause-and-effect relationship between revenue and the expenses, record them in the same accounting period.
Here are several examples of the matching principle Commission. A salesman earns a 5% commission on sales shipped and recorded in January. The commission of $5,000 is paid in February. You should record the commission expense in January. Depreciation. A company acquires production equipment for $100,000 that has a projected useful life of 10 years. It should charge the cost of the equipment to depreciation expense at the rate of $10,000 per year for ten years.
Employee bonuses. Under a bonus plan, an employee earns a $50,000 bonus based on measurable aspects of her performance within a year. The bonus is paid in the following year. You should record the bonus expense within the year when the employee earned it. Wages. The pay period for hourly employees ends on March 28, but employees continue to earn wages through March 31, which are paid to them on April 4. The employer should record an expense in March for those wages earned from March 29 to March 31.
Revenue vs. cash timing Accrued Revenue: Revenue is recognized before cash is received. Deferred Revenue: Revenue is recognized after cash is received
Contra revenue Sales returns: Contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods. Sales allowances: Contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. Sales discounts: Contains the amount of sales discount given to customers, which is usually a discount given in exchange for early payments by customers.
Revenue in Book Keeping Methods Records revenue when earned Accrual accounting Records expenses when incurredBook keeping Matching principle methods Records revenue when received Cash accounting Records expenses when paid
Difference of recordingrevenues b/w service andmerchandising companies:
Service company minus Operating equals NetRevenues expenses income
Revenue in services companyEXAMPLE: Overnight Auto service company collected$4000 for repairs made to vehicles of AIRPOT SHUTTLE SERVICE. DATE DESCRIPTION DEBIT CREDIT 2012 CASH 4000 MAY 4 REPAIR 4000 SERVICE REVENUE
Merchandising company Cost of Operating NetNet Sales minus minus equals goods expenses income
Revenue in Merchandising CompanyEXAMPLE: To illustrate credit sales transactions.PW Audio Supply records its May 4 sale of $3800 to Sauk Stereo. (Here we assume merchandise cost PW Audio Supply $2400).DATE DESCRIPTION DEBIT CREDIT2012MAY 4 CASH 3800 SALES 3800 4 COST OF 2400 GOODS SOLD 2400 MERCHANDISE INVENTORY
T-ACCOUNT• Let we illustrate it with the help of example: Jessica made deliveries and received $500 cash from clients: Delivery Fees 1) $500
ENTRY IN JOURNAL GENERAL: Example: On April 22, the Greener Landscape Group cuts grass for eight customers, billing each one $50 but receiving no cash. In accordance with the revenue recognition principle, revenue is recognized upon the completion of a service or the delivery of a product, even if no cash changes hands at that time. Therefore, an asset account (accounts receivable) increases and is debited for $400 and a revenue account (lawn cutting revenue) increases and is credited for $400.