Revenue is the amount of money earned by a business from the sale of goods and services to individuals and other businesses. It is recorded in the income statement as sales.
Revenue can also be earned through the use of capital or assets that are associated with the organization’s main operations before expenses and other costs have been deducted.
In the profit and loss statement, revenue or sales is positioned at the top where all expenses, costs and other charges are deducted resulting in the net income. As an important indicator, it allows investors to know the health of a business.
This refers to income that originates from the company’s core business activities. It can be the sale of products or the provision of certain services. As the lifeblood of a company, high amounts of operating income indicate that the business is thriving and stable.
This refers to revenue earned by a business from its secondary activities. A good example of non operating revenue is the sale of a subsidiary. This is not a core activity for the business.
Furthermore, the activity is only done once. Let’s assume the company’s core activity is technology. It has the following divisions – mobile app development, AI, IoTs and consultancy.
If the business decides to sell its mobile app development division, the sale will be a one-time occurrence. As you can see, the company will continue with its core activities – provision of technology related products and services.
Categories within non operating revenue include:
- Rental revenues – this is where the company leases or rents out their equipment to other organizations. For instance the leasing out of cell phone towers by a telecommunications provider.
- Dividend revenue – this is income earned from shares belonging to other companies and owned by another company. Let’s assume Company A is a technology firm and they are interested in the manufacture of cryptocoin miners. Since it will be expensive to set up a manufacturing plant, the company opts to buy shares in a start-up.
- Interest earned – Companies do earn interest on deposits made to their bank accounts or on investments made by the company.
One thing you ought to know is that companies do maintain separate revenue accounts. The reason for doing so is to track and evaluate its different sources of income. Furthermore, different revenue sources are taxed at different levels.
It is also common for companies to have contra-revenue accounts specifically for items that will impact revenue negatively. Some of these items include sales returns of goods by customers, bad debt estimates and sales discounts offered to customers.
During the calculation of contra revenue accounts, the amount is deducted from revenue earned by the company as a loss before the calculation of net profit and taxes due commences.
This method measures the health and performance of a company by recognizing its economic prowess. In this method, the current cash inflows/outflows are combined with future cash inflows/outflows thus providing an accurate picture of the company’s financial health.
The method became popular because investors, shareholders and management were in need of an accurate picture of the company’s financial health. Since items like selling on credit provide revenue to the company, it was important to come up with a method that takes into account such an event.
As an accounting method, it involves the recording of payment receipts received within a particular period and expenses settled within the same period. Basically, recording of revenues and expenses is done when cash has been received and paid.
Also referred to as cash-basis accounting, it is the opposite of accrual accounting. Let’s assume Company A ordered laptops from Company B on January 10th 2018.
Payment for the laptops is settled by Company A on January 19th 2018. The accountant at Company B will record revenue received on January 19th 2018 and not January 10th 2018. Why? Because Company A did not pay until the goods were delivered.
In the case of accrual accounting, the accountant at Company B will record the transaction as having occurred on January 10th 2018 even though no payment was made.
Revenue is an important measure that helps to show the health, position and performance of a business. This is vital to shareholders, investors and the management of the company.
Revenue is also used in financing the company’s operations without placing its assets on credit. Furthermore, it helps to prevent the overvaluing of a company’s net worth.