Revenue - definition, Importance and Types of Revenue in Accounting

Definition of revenue, its importance and different types

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Category :Accounting

Revenue refers to the income from business by sale of goods or providing services. It is the total income produced by a business or a given source. In this article we will define revenue its importance and types briefly.

It goes without saying that profits are important to the majority of businesses to determine the value of a business entity. Also, it might be said that the sole objective of running a business is yielding a financial profit. A company’s net income or profit is defined simply in this way: Net Income = Revenues – Expenses + Gains – Losses. Of the other most important metrics on financial statements, revenue is the most important measure to assess a company’s performance and prospects.

The reason that why revenue is so important because the essence of profitability is the revenue. And in order to get greater profits, revenues must be raised. There are times when revenue growth is more important than profits. A profitable business does not necessarily mean it is generating enough cash flow.

Even if does, it may be short term of temporary cash flow. Hence, it is important to look at revenues and finding the ways to raise revenues, so that a business may attain efficiency, profitability and sustainable success.

Revenue is the total amount received by a business. In accordance with the revenue recognition principle - being a cornerstone of accrual accounting and going with matching principle, it's stated that revenue should be recognized when a business entity has substantially completed the revenue generation process. So, the revenue is recorded when it is earned - not when the cash is received, unlike that it goes with cash basis accounting method.

Revenues are classified as operating and non-operating revenue.

Operating revenues are those that come in to a business from the company’s main or core business activities. This is the area through which a company earns most of its income. A software development company generates revenues by developing software or modules. Examples of operating revenue: Sales, rental income or providing services. Operating revenue is considered as the lifeblood of any company, as the high amounts of operating revenue is indicative of having or maintaining stable cash position.

Non-operating revenue or other income includes revenues earned from a company’s outside of its normal operations. These are the revenues that are associated with secondary operations of a business entity – not with main, central or core activities. An example of non-operating revenue is the income generated from the sale of subsidiary or division. Since it’s not to be sold again, the income is a one- time occurrence. It may further be understood this way; for example, if an institution is offering training and development services, the main source of revenue (operating revenue) is associated with the training and development activities being regarded as core operations of the institution. Since the institution might receive gifts, bequests or donations, it is to be recorded as non-operating revenue as such revenue might not be associated with the main activities of the institution.

The common revenue accounts are as follows:-

Revenue/sales/fess – These accounts are used to record the revenues earned from the main activities of a business entity. It is better to assign particular names to the accounts, so that the identification and the required analysis may be made smoothly.

Interest revenue – This revenue comes from an investment- usually from bank.

Rental revenue – it is used to record the revenue that is received by providing rental services, such as, building, equipment etc.

Dividend revenue – It is recorded when dividend on the stock is earned from other companies that pay dividends.

In addition, it is important to mention contra revenue accounts. Contra revenue accounts, as the name suggests, have apposite nature of accounts. They are contrasted with revenue accounts. Such as, sales return and sales discounts. Both are used to offset the relevant accounts or to reduce the value of the related account. It’s a way of better portraying the relationship between certain debits and credits.

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I am an Individual Member of Institute of Management Consultants of India. I am a Professional with a high creative capability based on Business, Management, Financial Accounting, Management Accounting, Finance and Management Consulting Field. I impart part time training and development programs. I write professional articles on business & management, business English and Software Engineering.