When an entity sells services or products to customers, it records revenue. The point to be noted here is that revenue recognition is not dependent upon the receiving of cash. Revenue has to be recorded irrespective of the receiving of cash or not. This method of revenue is called the revenue recognition concept or principle.
Example
The entity uses electricity to run its various computers and machinery to generate revenue. When an order is received, it is manufactured and delivered usually over a promise to receive payments in a certain number of days. Though payment will be collected after a certain number of days, the entity will record the sale once it is delivered to the buyer’s premises.
Classification of Revenue
There is two broad classifications of revenues:
Operating revenue – This is the revenue which generates from the core business activity of the entity. For example, FM Radio channel sells air time on its broadcasting. The revenue earned from air time sales is in the operating revenue.
Non- operating revenue – This is the revenue which generates from non-core business activities of the entity. For example, FM Radio channel helps the small and medium-size companies in the production of advertisement material and for this, it charges them. Though this is the revenue, it is not generating from the core business activity of the entity. So, it should be recorded as non-operating revenue.
Revenue Accounts List
The list is quite big, but the most common revenue accounts list is:
Sales/ Revenue
Rent revenue
Interest income/ revenue
Dividend income/revenue
Contra accounts of revenue
There are two contra accounts of revenue. These are:
Sales discounts – this is the benefit given to buyers of the services of products over the gross amount. The purpose of giving discounts is to collect payments from creditors early to improve the working capital cycle.
Sales returns – goods returned or services denied by the buyers of the products or services. So, the accountant has to record such a reversal in the sales returns account.