Revenue is the income generated from normal business operations and includes discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.
Examples of revenue accounts include: Sales, Service Revenues, Fees Earned, Interest Revenue, Interest Income. Revenue accounts are credited when services are performed/billed and therefore will usually have credit balances. At the time that a revenue account is credited, the account debited might be Cash, Accounts Receivable, or Unearned Revenue depending if cash was received at the time of the service, if the customer was billed at the time of the service and will pay later, or if the customer had paid in advance of the service being performed. If the revenues earned are a main activity of the business, they are considered to be operating revenues. If the revenues come from a secondary activity, they are considered to be nonoperating revenues. For example, interest earned by a manufacturer on its investments is a nonoperating revenue. Interest earned by a bank is considered to be part of operating revenues.
Revenue Recognition Principle
According to the revenue recognition principle in accounting, revenue is recorded when the benefits and risks of ownership have transferred from seller to buyer, or when the delivery of services has been completed. Notice that this definition doesn’t include anything about payment for goods/services actually being received. This is because companies often sell their products on credit to customers, meaning that they won’t receive payment until later.
- When goods or services are sold on credit, they are recorded as revenue, but since cash payment is not received yet, the value is also recorded on the balance sheet as accounts receivable.
- When cash payment is finally received later, there is no additional income recorded, but the cash balance goes up, and accounts receivable goes down.