Question and Answer: Revenue

Q: What are Revenues?

A:

Revenues are the amount that a business earns from sales and services it carries out on a daily basis.  For example, a trader earns revenue from the sale of goods while an accountant earns revenue from the fees he collects from his/her clients, and a bank’s revenue will include the interest that it earns from loans to borrowers.  Some companies especially owners of mining sites earns revenue in form of royalties.

For non-profit making organizations, their own revenue is regarded as receipts, because their revenue is not from any profit making activity but are always in form of donations, grants, membership dues, fund raising activities, income relating to the mission of the organization and income from financial securities like stocks bonds and investment funds.

There are two type of revenues: operating and non-operating revenues.

Operating revenues are generated from a company principal business activities. That is, the area the business has chosen to operate. For example, a fabric trader’s revenue will come from selling fabric.

Sales – A sale is an exchange of goods for cash or a claim to cash. Sales are typically made by manufacturers, wholesalers, and retailers when they sell their inventory to customers. For example, a clothing retailer would record the income from selling a shirt to a customer as a sale or a merchandise sale

Rents – Rental income is earned by a landlord for allowing tenants to reside in his or her building or land. The tenants often have to sign a rental contract that dictates the details of the rental payments. According to the accrual method of accounting, the landlord records rental income when it is earned – not paid.

Consulting Services – Consulting service or professional services include all income from providing a service to a customer or client. For example, a law firm records professional service revenues when it provides legal services for a client.

Non-operating Revenues or Other Income

Other income includes all revenues generated by a company outside of its normal operations. Usually non-operating revenues are only a fraction of operating revenues.

Here is an example of non-operating revenues:

Interest income – Interest income is the most common form of non-operating income because most businesses earn small amounts of interest from their savings and checking accounts. Interest income isn’t only limited to bank account interest. It can also include interest earned from accounts receivable or other contracts.

Disposal of Assets – Proceeds from the sale of property plant and equipment used the business is also another source of non-operating income. An item of property plant and equipment can be sold either as a result of expansion, change in technology, or rationalisation.

The revenue account is always recorded on the credit side and carries a credit balance all the time. This is because revenue add to the business and in effect increase the value of the owners’ stake in the business.

Revenues is always found at the top of Statement of Income and other Comprehensive income. This is to make it possible to easily deduct expenses from it

Difference between Revenue and Income

Revenue (sometimes called sales) refers to all the money a company takes in from doing what it does — whether making goods or providing services.  While income (whether gross or net is the phrase commonly used to refer to a company’s “profit.” It represents how much money the company has left over, if any, after it’s paid the costs of doing business — payroll, raw materials, taxes, interest on loans, etc..