3.1. Accounting for revenue

Accounting for Revenue

Revenue is the income earned by a business from its normal operations, such as selling goods or providing services. Proper accounting ensures that revenue is recognized in the correct accounting period and accurately reported in financial statements.

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1. Definition of Revenue

Revenue is the gross inflow of economic benefits arising from the ordinary activities of a business.

Examples:

• Sales of goods

• Service fees

• Interest income

• Rent income

• Commission income

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2. Recognition of Revenue

Revenue should be recognized when it is:

1. Earned (the goods or services have been delivered)

2. Measurable (the amount can be reliably determined)

3. Collectible (there is a reasonable expectation of receiving payment)

This follows the accrual principle:

• Revenue is recorded when earned, not necessarily when cash is received.

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3. Accounting for Revenue (Double Entry Rules)

a) Cash Sales

When revenue is received in cash immediately:

b) Credit Sales

When revenue is earned on credit (payment to be received later):

c) Other Revenue

Other types of revenue, like interest or rent, are recognized as earned:

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4. Revenue and the Income Statement

Revenue is a key component of the Income Statement.

• Total revenue earned is recorded at the top of the Income Statement

• Expenses are deducted from revenue to determine profit or loss

$\text{Profit/Loss} = \text{Revenue} - \text{Expenses}$

Profit/Loss=Revenue−Expenses

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5. Key Points in Revenue Accounting

1. Accrual Principle: Revenue is recognized when earned.

2. Matching Principle: Revenue must be matched with related expenses.

3. Documentation: Sales invoices, receipts, and contracts support revenue entries.

4. Internal Controls: Revenue should be verified to prevent errors or fraud.