Revenue

Revenue refers to the mechanism by which income enters a company.

Learning Objective

Explain how a company generates and records revenue

Key Points

Expenses should be matched with revenue. The expense is recorded in the time period in which it is incurred, which is the time period that the expense is used to generate revenue.
Revenue accounts indicate revenue generated by the normal operations of a business. Fees Earned and Sales are both examples of Revenue accounts.
Revenue accounts have a normal credit balance.

Terms

income
In U.S. business and financial accounting, the term "income" is also synonymous with revenue; however, many people use it as shorthand for net income, which is the amount of money that a company earns after covering all of its costs.
Revenue Recognition
Revenue should not be recorded until the earnings process is nearly complete and there is little uncertainty as to whether or not collection of payment will occur.
revenue recognition principle
income is recognized when it is realised or realisable, and is earned (usually when goods are transferred or services rendered), no matter when cash is received
revenue expenditures
an ongoing cost for running a product, business, or system

Full Text

Revenue

A simple cash register

Cash registers are a point at which companies capture revenue.

Revenue refers to the receipt of monetary value from the sale of goods or services and other income generating activities. Revenue is recorded for accounting purposes when it is earned by an entity, which usually involves an exchange of value among two or more parties in an arm's length transaction.

In U.S. business and financial accounting, the term "income" is also synonymous with revenue; however, many people use it as shorthand for net income, which is the amount of money that a company earns after covering all of its costs (which is not the same as revenue).

Revenue Accounts

Revenue accounts indicate revenue generated by the normal operations of a business. Fees Earned and Sales are both examples of Revenue accounts. Revenue accounts have a normal credit balance. Common income accounts are operating revenue, dividends, interest, and gains.

Revenue Recognition Principle

Revenue should not be recorded until the earnings process is nearly complete and there is little uncertainty as to whether or not collection of payment will occur. This means that revenue is recorded when it is earned, or when the job is complete.

Matching Principle

Expenses should be matched with revenue. The expense is recorded in the time period in which it is incurred, which is the time period that the expense is used to generate revenue. This means that you can pay for an expense months before it is actually recorded, as the expense is matched to the period the revenue is made.

It is important to realize that revenue and expenses are not always the same as cash inflows and outflows. For a given cash outflow, an expense can be recognized in a period prior to payment, the same period or a later period. The same idea holds for revenue and incoming cash flows. This is what accounting makes very flexible and at the same time exposes to potential manipulation of net income. Accounting principles provide guidance and rules on when to recognize revenue and expenses.

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