In accounting terms, revenue is the income made by a company from its primary operations, including trading, selling products, and providing services.
However, since revenue causes the owner(s) equity to increase, which is a credit balance, it is recorded as a credit on a company’s balance sheets.
Below, we thoroughly explore this topic!
The total income generated from the sale of goods and services is known as revenue in accounting. However, revenue should not be confused with net income (profits) since it encompasses every source of income and operating expenses.
While revenue is recorded as the top line on a company’s income statement, net income is placed at the bottom after eliminating the corresponding costs.
Also known as sales in company ledgers, gross revenue is reported on a quarterly, semiannual, and annual basis and should never be considered alone when determining the business's health, as it must be analyzed alongside the expenses to get the actual profits.
Depending on the income source, accountants utilize several types of accounts to record different types of revenue, including operating income (from the sale of goods and services) and non-operating revenue accounts (infrequent and non-recurring income):
Note: All of these revenue streams are presented both separately and summed up on a company’s balance sheets for a specific period.
Per the principles of double-entry accounting, every transaction must be recorded in both a debit (assets coming in) and a credit account (assets going out). For instance, since revenue increases the owner’s equity, it is recorded as a credit in the revenue account. But, before closing the books, the same amount is also debited into the main bank account.
The standard accounting equation further demonstrates this balance:
Assets = Liabilities + Owner's Equity
As you can see, once a business earns revenue, it will debit the corresponding asset account (on the left), but at the same time, it will have to credit a matching credit account (on the right) to retain the equation balance, and thus increase the owner’s equity.
To illustrate the relationship between debit and credit accounts, consider a bakery providing goods worth $500, which results in a new entry for that sum in its cash account. However, to retain the balance of the ledger, that $500 must also be recorded in the corresponding revenue column, which increases the owner’s equity by said amount.
However, suppose the bakery is offering a $100 discount on its $500 goodies. In that case, accountants also have to enter the discount in a so-called ‘contra revenue’ account with a debit balance, which results in a reduced total revenue of $400.
Your email address will not be published.