Cloud Controller Inc. | What is Revenue?
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What is Revenue?

What is Revenue?

What is Revenue?

Have you ever heard the term, glamour muscles?

You know, the slang used by gym pros who see other’s working on the muscles that are for show, not actual strength?

Okay, well if there’s any connection between Accounting and pumping iron, it’s the account we’re about to discuss.

Revenue

Revenue is the amount of money that a company earns. If you mow ten lawns for $10 a piece, you have $100 in revenue.

It’s also important to remember the difference between gross and net revenue. Gross revenue is the total amount of billings, net revenue is the total amount of billings minus any discounts or returns.

Just so we hammer that part home, think about that time you needed the tool from Home Depot, but didn’t want to pay for it.

You paid $200 for it on Thursday, but then you returned it for $200 on Saturday. Assuming you found the slowest Home Depot and you were their only sale, they would show $200 in gross revenue and $0 in net revenue for that week.

Examples of Revenue

Whew, my fingers cringed after writing that.

No, not because they’re scared of revenue, but because they know this is the section where I list out all examples.

This article is going to be a game-changer because I’m not going to list out every revenue example.

I doubt you want to see a 291,087,902,201 page article on this anyway.

So I’ll give you enough to get the creativity flowing: Lawn mowing, baseball card selling, funnel cake making, eBay retailing, and affiliate marketing – that’s all revenue.

If you earn money for selling a product or service, you know revenue.

Revenue’s Role in Accounting

Type of Account

It doesn’t take an Accounting degree to realize that revenue is indeed, a revenue account.

Information that might be a little more valuable, however, is that revenue is an income statement account.

Location

I’m not sure if this was by design, but accounting likes to start off with the good things, and then tear you down with the bad things.

And yes, that was a subtle spoiler alert – revenue is on top of the income statement.

As mentioned earlier, you also need to make sure that you understand the difference between gross and net revenue.

First, comes revenue and then comes discounts and returns, lastly, we have net revenue.

Let’s provide a visual of this.

I like the guilty look on your face after my Home Depot example, so we’ll stick with that.

You bought the tool for $200, then turned around and returned it two days later.

Somehow, you found the one Home Depot that only makes one sale per week, so your transaction is all they have.

Example

Revenue on an Income Statement Revenue on an Income Statement

This example provides a visual of how revenue is stated on an income statement.

They have to report the initial $200 sale, but then they turn around and make it a net $0 with the return column.

It’s also important to note that COGS would be stated if the return hadn’t occurred. I’ll explain this more in the journal entry section…

Journal Entry

I’m not sure if you’ve read any of my other articles, but I am a huge supporter of understanding the underlying logic.

Why?

Because I think it’s the best way for you to learn. Once you know the underlying logic, you can apply this logic and solve more complex issues.

And the underlying logic of accounting is shown in journal entries.

For revenue journal entries, one entry (per transaction) is ideal. If you have more than that, something unfavorable probably occurred.

Like someone buying a tool from your store and returning it two days later.

Since we’re on a roll, let’s stick with that example. To add another piece of information, let’s assume this tool cost you, the business owner, $50.

The following journal entries would apply:

The first journal entry is one recording the $200 sale.

Example

Journal Entry Recording Sale Journal Entry Recording Sale

This journal entry records our initial sale.

Impacted Areas

The first area of impact is cash (We’ll assume that the tool was purchased with cash).

Cash is an asset, and assets increase with debit transactions. In this case, we received $200 for our sale, and cash increased $200.

The other debit transaction is Cost of Goods Sold (COGS). When we sell a product, we must show how much it cost us. Although we received $200, we didn’t make $200 of profit.

The purchased tool cost us $50, and that is our COGS. COGS is an expense, and all expenses increase with debit transactions.

On the opposite side, we have our credit transactions.

The first credit transaction is inventory. $50 of inventory is removed from our balance sheet after this sale. Inventory is an asset, and all assets decrease with credit transactions.

The last account is our revenue.

Revenue is income, and all revenue increases with credit transactions. In this case, revenue increased by $200.

Both sides of the entry equal $250, a balanced journal entry.

Now we must account for the return. In this return, we’ll assume that the tool is in excellent shape and returned to inventory.

Example

Sales Return Journal Entry Sales Return Journal Entry

This journal entry records our return.

Impacted Areas

The first area of impact is inventory. As mentioned above, this inventory was in excellent condition (because you only used it once), and we return it to our shelves.

Inventory is an asset, and assets increase with debit transactions. This journal entry adds $50 worth of inventory to our balance sheet.

The other debit is our Sales Return account. Sales Returns is a Contra Revenue account.

Contra accounts are opposite of their related account. Revenue is a credit balance, and sales returns is a debit balance.

On the credit side, we start with COGS. The inventory was returned and it is no longer a cost of goods sold.

To account for this, we need to reduce COGS by $50. COGS is an expense, and expenses decrease with credit transactions. Our COGS amount is $50 lower after this transaction.

The last area of impact is cash. We received $200 cash from the sale and remitted $200 cash for the return. Cash is an asset, and assets decrease with credit transactions. Our cash is $200 lower after this transaction.

The balance sheet wouldn’t change at all with this transaction, and the income statement looks just like our first example.

Other Areas of Impact

Remember earlier in the article when I referred to revenue as the glamour muscles of accounting?

I didn’t say this solely for an attention getter, I said this because I think too many focus on revenue and forget about other key areas.

Don’t get me wrong, revenue is good to have, but it shouldn’t be your only focus. Taking on projects with high revenue, but low profit will ruin a company.

Think about it, would you rather have $1,000,000 in revenue and $20,000 of profit or $100,000 in revenue and $30,000 in profit?

In most cases, the latter.

The former might get some respect in unique situations, such as investors who believe they can increase the profit margin, but you get the point.

Revenue looks good, but it provides no benefit if you’re not making a profit.

Revenue also impacts ratios that calculate turnover days based on revenue. A common form of this is accounts receivable turnover.

Many investors or creditors also like to see revenue growth, as long as it is favorable growth. But as we both know, this isn’t really new information. Investors or credits like to see all types of favorable growth. It just seems like revenue growth is one of the first statistics measured.

Revenue Recap

  • Gross proceeds from a sale
  • Income statement account
  • Should always be profitable
  • Increases with credit transactions
  • Once revenue is recorded in a year, it is not eliminated. If any deductions, such as returns or discounts, occur, then a contra revenue account should be used




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