Examples of revenue in the following topics:
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- Revenue refers to the mechanism by which income enters a company.
- Revenue accounts indicate revenue generated by the normal operations of a business.
- Revenue accounts have a normal credit balance.
- Expenses should be matched with revenue.
- The same idea holds for revenue and incoming cash flows.
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- Transactions that result in the recognition of revenue include sales assets, services rendered, and revenue from the use of company assets.
- They both determine the accounting period in which revenues and expenses are recognized.
- Revenue is recognized due to the passage of time or as assets are used.
- The principle allows a better evaluation of the income statement, which shows the revenues and expenses for an accounting period or how much was spent to earn the period's revenue.
- Guidelines for revenue recognition will affect how and when revenue is reported on the income statement.
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- Companies can recognize revenue at point of sale if it is also the date of delivery or if the buyer takes immediate ownership of the goods.
- Since most sales are made using credit rather than cash, the revenue on the sale is still recognized if collection of payment is reasonably assured.
- The revenue earned will be reported as part of sales revenue in the income statement for the current accounting period .
- When the transfer of ownership of goods sold is not immediate and delivery of the goods is required, the shipping terms of the sale dictate when revenue is recognized.
- A street market seller recognizes revenue when he relinquishes his merchandise to a buyer and receives payment for the item sold.
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- Accrual accounting allows some revenue recognition methods that recognize revenue prior to delivery or sale of goods.
- The accounting principle regarding revenue recognition states that revenues are recognized when they are earned (transfer of value between buyer and seller has occurred) and realized or realizable (collection is reasonably assured).
- Revenue must be realizable.
- Completion of production method: This method allows recognizing revenues even if no sale was made.
- All expected revenues and costs of production related to the units produced will be reported on the income statement.
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- In this situation, revenue is not recognized at point of sale or delivery.
- There are three methods that recognize revenue after delivery has taken place: .
- The installment sales method recognizes income after a sale or delivery is made; the revenue recognized is a proportion or the product of the percentage of revenue earned and cash collected.
- The seller records the cash deposit as a deferred revenue, which is reported as a liability on the balance sheet until the revenue is earned.
- As the delivery of the magazines take place, a portion of revenue is recognized, and the deferred liability account is reduced for the amount of the revenue.
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- A deferred revenue is recognized when cash is received upfront for a product before delivery or for a service before rendering.
- If the deferred item relates to revenue (cash has been received), it is carried as a liability.
- An example of a deferred revenue is the monies received for a 12-month magazine subscription.
- A deferred revenue item involves cash received before the earnings process is complete.
- Explain the purpose of classifying transactions as either deferred or unearned revenue
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- Revenue is recognized when earned and payment is assured; expenses are recognized when incurred and the revenue associated with the expense is recognized.
- The assets produced and sold or services rendered to generate revenue also generate related expenses.
- Accounting standards require that companies using the accrual basis of accounting and match all expenses with their related revenues for the period, so that the income statement shows the revenues earned and expenses incurred in the correct accounting period.
- By tying revenues and expenses to the completion of sales and other money generating tasks, the income statement will better reflect what happened in terms of what revenue and expense generating activities during the accounting period.
- Explain how the timing of expense and revenue recognition affects the financial statements
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- Accrual accounting does not record revenues and expenses based on the exchange of cash, while the cash-basis method does.
- Just like revenues, the recording of the expense is unrelated to the payment of cash.
- The cash method of accounting recognizes revenue and expenses when cash is exchanged.
- For a seller using the cash method, revenue on the sale is not recognized until payment is collected.
- Just like revenues, expenses are recognized and recorded when cash is paid.
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- In accounting, recognition of revenues and expenses is based on the matching principle.
- Depreciation matches the cost of purchasing fixed assets to revenues generated by them.
- Related revenues as two types of accounts:
- Accrued expenses shares characteristics with deferred revenue.
- Deferred expenses share characteristics with accrued revenue.
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- An income statements may also be referred to as a profit and loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations.
- A company's financial statement indicates how the revenue, money received from the sale of products and services before expenses are taken out, is transformed into the net income, the result after all revenues and expenses have been accounted for, also known as Net Profit.
- It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs and taxes.
- In the multiple-step format revenues are often presented in great detail, cost of goods sold is subtracted to show gross profit, operating expenses are separated from other expenses, and operating income is separated from other income.
- The income statement is used to assess profitability, as the expenses for the period are deducted from the revenues.