The earnings of a business generated by selling products or providing services over a period of time are called revenue. Following revenue definition describes this term more clearly as

revenue definition

Revenues increase owner’s equity. When a company sells goods to customers or render services, it normally gets money in the form of cash or accounts receivable. This inflow of cash or accounts receivable increases assets of the company, while on the other side of the accounting equation, there is no change in current liabilities or long-term liabilities but owner’s equity changes to balance the accounting equation. Therefore a company’s revenue is the gross change in the owner’s equity that results from the business operations.

Revenue Formula

To calculate the revenue following simple formula can be used

Revenue = Selling Price x No. of units sold

In the formula above “selling price” is the price at which the product was sold out to customers and “No. of units sold” is the quantity of that product. So if we multiply the selling price with the units sold we will get the amount of revenue.

Recording Revenue in Books of Accounts

Different businesses use different account titles to record their revenue in their books of accounts. Some of these include, for example;

  1. An Auto Service Company records its revenue in account “Repair Service Revenues”
  2. A Trading Company records its revenue in account “Sales”
  3. A Doctor, CPA or Lawyer may record his revenue in account “Fees Earned”
  4. A Real Estate Agency records its revenue in account “Commissions Earned”
  5. A Bank records its revenue in account “Interest Income”

A company may have more than one account to record its revenues, for example, revenues from sales of merchandise, revenues from Investment (i.e. interest income or dividend), revenues from purchases returned to the suppliers and revenues from discounts received from suppliers.

 When to Record Revenue

According to realization principle, revenue should be recognized at the time goods are sold or services are rendered. At this point, the business has essentially completed the earnings process and the sales value of the goods or services can be measured objectively.

Recording Revenue: Journal Entry

When goods are sold or services are rendered, following journal entry is used to record this transaction in the ledger accounts.

Cash / Bank / Accounts Receivable Debit

Sales / Fees Earned / Interest Income Credit

Revenue Definition Example Video


You may like to read: