Revenue (Accounting) - Explained
What is Revenue?
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What is Revenue?
A revenue in its basic form is a resource generated from a company's earnings activity. Really revenues are just what we earned If we earn it, it's a revenue.
When Do We Earn Revenues?
The revenue recognition principle states that we earn revenue when we deliver the product or service or when the product or service is rendered. If I have not rendered the product or service, then it's not a revenue.
Examples of Revenue
Example 1: If I'm selling something to you (a pin). You want this pin. You say, hey I really want that pin. I say, sure - here's your pin. Then you give me 20 bucks because it's an expensive pin. Okay. I have 20 in my hand you have the pin in your hand. I have rendered the product or service to you. This is a revenue. It doesn't even matter if you have paid the cash yet. The fact that you now owe me the money means that this a revenue.
Example 2: You say, I really want that pin. I said, sure - and I give you the pin. You say, I don't have 20 bucks on me right now. Can I give it to you next week? Well, I've given you the pin, so that's still a revenue for me. It doesn't matter that I haven't received the cash. It's a revenue for me because I have given you (delivered or rendered) the product; therefore, it is a revenue,
Example 3: You say, I really want one of those pins. I say, I don't have a pen right now. Can I get it to you next week? You say, sure. I have 20 in my pocket right now. I'll go ahead and pay you now. I take the money and promise to deliver the pin. This is not revenue. I never rendered the product or service. I got twenty dollars cash, but I cannot claim that as revenue because I haven't given you the product service.
Summary of Revenue
Whether something is a Revenue depends upon whether I have delivered or rendered you the product or service,
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- What is a Balance Sheet? – Financial Accounting
- What is the Statement of Cash Flow? – Financial Accounting