Companies that exist to profit depend on revenues. While expenses also play a part in those profits, the more sales a company makes, the more it profits. Therefore, most companies focus on increasing their revenues. These revenues may generate from products or services. Similarly, these products and services will differ from one company to another.
Revenues are an income for companies. They appear on a company’s income statement as a positive amount. Companies then reduce their expenses from this amount to reach their profits.
However, revenues also contribute to a company’s equity on the balance sheet if a company makes profits. This treatment raises a question on whether revenue is a debit or credit. Before understanding that, however, it is crucial to define what revenue is.
What is Revenue?
Revenue represents the income that companies make from their products or services for a period. While companies may also collect sales proceeds from other sources, for example, the sale of assets, they aren’t revenues.
For service-based companies, these revenues may include fees earned from providing services. For product-based companies, they will consist of proceeds from sales of finished goods.
For some companies, revenues may be more complex than others. These include companies that offer both products and services, contractors, contingent services, etc.
The accounting for these revenues also differs from others. In essence, however, the revenues remain the same. The only difference may be in how companies recognize those revenues.
Revenues represent the assets that companies earn from their operations or business activities. For companies that sell products and services in cash, it will be the money received from customers. Companies that offer credit sales will also incur account receivable balances from sales along with any cash collected.
Revenues are an income account in a company’s financial statements. It also indirectly relates to equity due to its impact on retained earnings or accumulated profits. Income is an inflow of economic resources during a period. It is one of the five fundamental accounts that exist in financial statements. The accounting treatment for revenues is similar to any income companies generate.
What are the Revenue recognition criteria?
IFRS 15 Revenue from Contracts with Customers requires companies to satisfy five points to recognize revenues. These are as below.
- Identify the contract.
- Identify the separate performance obligations within the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenues when or as a performance obligation is satisfied.
In most cases, companies can record revenues when they occur. Usually, companies can recognize these at the time of occurrence. In some cases, however, the revenues may expand over a period due to a contract. Therefore, companies will need to follow all of the above five steps to recognize the revenues.
Is Revenue a debit or a credit?
Revenues represent a company’s income during an accounting period. This income impacts a company’s equity as well, increasing it when a company generates revenues.
Since growth in both income and equity accounts is a credit, revenues will also be a credit entry. The recognition of revenues will differ based on a company’s operations. However, the journal entries will be the same.
When companies make sales, either products or services, they will increase their revenues. Some companies may sell these products in cash or receive money through the bank. Others may sell it on credit. Therefore, the accounting entries for revenues will differ. A company that makes cash-based revenues will have the following journal entries.
|Revenues (or Sales)||XXXX|
Similarly, for money received through the bank, the accounting entries will be as follows.
|Revenues (or Sales)||X,XXX|
Lastly, the journal entries for credit sales will be as follows.
|Revenues (or Sales)||X,XXX|
The above three entries do not require a company to record revenues when it receives cash. This treatment comes under the accruals concept in accounting. This concept requires companies to record transactions when they occur rather than when settlement occurs.
Regardless of how a company makes sales, revenues will be a credit in the accounts. Sometimes, however, a company’s revenues will also decrease. This decrease is not direct but comes as sales returns.
However, companies don’t record the amount in the same revenues account. Instead, they use a contra revenue account for it. The journal entries for sales returned by customers will be as follows.
|Cash / Bank / Accounts Receivable||X,XXX|
Sales returns will not necessarily exist for every company. For example, customers cannot return services. Similarly, some companies do not offer a sales return policy.
However, if a customer returns goods that a company sells them, it must record those returns. The journal entries for sales returns will remain the same as above. However, the sales or revenues account will not get affected.
How to present Revenues on the Income Statement?
Presenting revenues in the income statement is straightforward. Companies must aggregate their sale proceeds from all products and services. This amount will constitute the company’s revenues that will then appear on the income statement. Sometimes, however, companies will report their net sales, which is different from revenues.
As mentioned, some companies may have a sales return policy that allows customers to return faulty products. Similarly, companies may also offer discounts or allowances on revenues. All of these decrease the revenues a company makes. However, these will not impact the revenues account. Instead, these features will create a contra revenue account. This account will decrease the gross revenues to reach net revenues.
When companies offer sales returns, discounts, or allowances, they must report their net sales on the income statement. The presentation will be as follows.
|Less: Sales Return||(XXXX)|
Usually, the income statement only includes the net revenues figure. The above breakup will be a part of the notes to the financial statements. By presenting their revenues as above, companies can offer users more useful information.
A company, ABC Co., sells bicycles and accessories. The company makes both cash and credit sales. During the year, the company sold bicycles and accessories worth $500,000 for cash. The accounting entries for these sales will be as follows.
Similarly, it made sales of $300,000, for which it received cash through the bank. The accounting entries will be as follows.
Lastly, ABC Co. sold products worth $400,000 on credit during the period.
|Accounts Receivable||$ 400,000|
During the period, customers returned bicycles and accessories worth $200,000. Of these, $125,000 related to cash sales, $50,000 related to bank sales, and $25,000 to credit sales. ABC Co. can record each transaction individually. However, the collective journal entries will be as follows.
|Sales Return||$ 200,000|
|Accounts Receivable||$ 25,000|
ABC Co. will present its revenues in its income statement as follows.
|Less: Sales Return||$(200,000)|
Revenues represent income from a company’s products and services for a period. IFRS 15 presents a five-step process for recognizing revenues. Due to being an income and positively impacting equity, revenue is a credit in accounting. However, discounts, allowances, and sales returns may reduce it. The residual amount after subtracting these is known as net sales.