Revenue in accounting refers to the entire amount of money made through selling products and services from a company’s core operations. Revenue is another word for businesses’ income, sometimes called sales or turnover.
Due to revenue’s importance, it’s often referred to as the “top line” in accounting. Companies create different revenue accounts to differentiate earned revenue by type.
Revenue accounts are crucial for better financial overview and reporting. Revenue accounts contribute to companies’ ability to make informed decisions and strategic planning.
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What is revenue?
Revenue, simply put, is the total income before deducting expenses.
Defining what exactly revenue is and when it is recognized, is a procedure called revenue recognition. It is defined by Financial Accounting Standards Board (FASB) as a part of Accounting Standards Codification – ASC 606.
For more detailed information, please read our blogs on the topic of revenue. Without going too much into detail, let’s here just show three simple examples of what revenue is and what is not.
A company sells a computer for $500 to the customer. The customer receives it and pays for it.
This amount is considered revenue.
A company sells a computer for $500 to the customer. The customer receives it but will pay for it in the next 30 days.
This amount is revenue because the customer has received the goods.
A company sends a quote for a computer for $500 to the customer. The customer pays for it in advance with the promise of delivery in the next 30 days.
Until the goods are not delivered, the $500 is not revenue, even if the money is already in the company’s account.
Businesses strive to increase revenue and reduce expenses to achieve maximum profit, represented as net income, or the “bottom line.” The ultimate objective of any new business is to swiftly and effectively create income while maintaining the lowest possible cost of goods or services.
When talking about revenue in accounting, we must mention revenue leakage. It is the term that describes a common problem businesses have when failing to collect all due payments, aka revenue.
The revenue calculation formula
In its simplest form, the revenue formula will multiply the number of sales with the selling price.
Revenue calculation has two variables:
- The number of units sold
For the number of units sold, we can take the actual number of products sold or, in the case of services, the number of customers who bought or subscribed to the service.
- The sales price
The sales price can be fixed or variable, for instance, because of discounts. In the case of variable price, the price used in the calculation will be the average sales price of goods or services.
Revenue Formula for goods
Revenue = number of goods sold * fixed or average price of goods
Revenue Formula for services
Revenue = number of customers * fixed or average price of service
Revenue accounts & accountants
As mentioned, revenue accounts are created to divide the company’s earnings. The financial administration of many different sectors depends on revenue accountants who oversee the revenue accounts.
They are also referred to as senior accountants. Accordingly, the revenue accountant’s responsibilities might vary significantly based on th type of company.
The person employed in this role is responsible for tracking and reporting incoming revenue, producing bills, maintaining precise transaction records, and collaborating closely with other departments to resolve issues and reconcile payments.
A revenue accountant is also in charge of creating new reporting, editing old reporting, and strengthening internal controls over revenue by developing and executing policies and processes across the entire organization.
Revenue accountants prepare reports and forecast that the executives study and use to guide future operational and strategic planning decisions.
Knowing where a company creates revenue and how successful it is, is crucial for success.
Revenue accounting with a billing software
Revenue accounting is normally done with the help of a billing and revenue management platform, a billing software designed to automate the entire billing and revenue recognition process.
Therefore, revenue accounting is essential to every business’s accounting and analytical department.
Revenue accounting is a basis for revenue management, a set of data-driven tactics and strategies every company uses.
Types of revenue accounts
Operating and non-operating revenues are the two different sorts of revenue.
Most of the business’s net income comes from operations, and they aim to expand the operations. On the other side, non-operating revenues usually account for a small portion of total revenue and comprise additional money unrelated to their core business.
Some types of revenue accounts include:
The Revenues/Sales account records incoming funds from primary business operations and operating revenue. Some businesses may be more explicit in naming sales accounts.
Service Revenue, for example, is a sort of account that tracks sales from services a business provides.
If a business has buildings or equipment for renting, they need to make a Rent Revenue account. This is a non-operating revenue if the rents are made in advance. A business would record it as an unearned rent revenue account since tenants pay before using the space.
Once a business earns the revenue, it can reduce the unearned rent revenue account and increase the rent revenue account.
If a business owns stocks in other companies, it will receive dividend payments. Dividend revenue is another non-operating revenue because it is not a day-to-day activity and is not the primary operation of the business.
Another non-operating revenue is interest revenue. A business must create an interest revenue account if they have investments earning interest. For example, a business invests money into another business and earns interest. It will help if a business records the interest revenue as its journal entry.
Contra revenue – sales return and discount
Contra revenue accounts deduct money from a business’s sales revenue. A business needs to debit these accounts and credit the corresponding account, like accounts receivables.
A business can have a sales return account or a sales discount account that will record money reimbursed to clients. The Sales Discounts account contains the business’s discounts to its customers.
Revenue accounting & the revenue backlog
The revenue backlog includes the value of committed revenue in SaaS or subscription agreements that are not yet fulfilled. Therefore they can’t be recognized.
While revenue backlog can exist in both traditional and subscription businesses, the structure of subscription models’ revenue recognition causes nearly all subscription organizations to have a revenue backlog.
The revenue backlog is the entire amount of unrecognized revenue in the revenue schedule for the term of a SaaS or subscription agreement. It can include revenue from subscription-based and one-time services, such as training and implementation.
The backlog includes revenue that is not yet recognizable due to pending customer acceptance criteria, incomplete delivery of professional services, and other issues. However, the revenue backlog might include the future value of current or pending subscriptions.
A business should only include revenue in the backlog of revenues if there is solid recognition or proof that both business and the customer will fulfill the subscription or license agreement’s obligations.
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