What is Revenue?

To put it simply, revenue is the money earned by a business whenever it makes a sale.

The main aim of most businesses is to make as many sales as possible. Behind each of these sales will be a customer who pays the business for goods or services. As bookkeepers, we must record each of these transactions as revenue within the income statement of the business. By doing this, the income statement will accurately reflect the amount of money earned from selling goods/services within the relevant period.

There are a number of different words used when talking about revenue within a business such as: turnover, sales and income. All of these words refer to the same thing so don’t let that confuse you!

What are the different types of revenue?

The type of sales being made vary from business to business. Some businesses sell goods in order to earn money while some will provide services to their customers. The way in which a business brings in money is known as its revenue stream.

There are some businesses that combine both the sale of goods and provision of services. This is known as having multiple revenue streams.

An example of a business that provides both of these is Amazon. A large portion of Amazon’s revenue is generated from selling goods that its customers order online. However Amazon also make money through the prime video streaming service.

Another example of this could be a car dealership. The main bulk of sales made by a car dealership will be cars sold to customers. However, most car dealerships will have a garage attached which allow them to provide maintenance and repair work to customers cars.

Generally speaking, a business with more revenue streams is likely to be stronger. This is because there income is not reliant on one source. For example, If everyone stopped buying new cars overnight, a car dealership with a garage attached would still be able to make money by carrying out work on customer’s cars – even if they never sold another new car.

When should a sale be recorded?

The point at which a sale should be recorded as revenue within the financial statements is known as the revenue recognition point (i.e. the point at which we recognize a sale has been made). We have a very in-depth post surrounding revenue recognition which can be found here, however an overview is provided below.

The revenue recognition point depends on whether a business is using the cash or accruals basis of accounting.

If the businesses is using the cash basis, revenue recognition is quite easy; revenue should be recorded when the customer pays for the goods or services.

When businesses are using the accruals basis of accounting (as most will be), the recognition point is not always the point at which the customer pays. Instead, the revenue recognition point is when the ownership of goods is transferred to the customer OR when the service has been performed.

To make sense of this, imagine you wash your friends car and they agree to pay you in two week’s time. When you finish washing the car, the service has been performed and therefore the revenue should be recognized in the income statement at this point. The fact that the cash will not be received for another two weeks is irrelevant. In this case the amount receivable will sit on the balance sheet in a trade receivables account until the cash is actually paid over. We have explained more about revenue double entries in our recent article.