Definition
Revenue is the income a business earns from its ordinary activities, such as selling goods, providing services or licensing software. Under the accrual basis it is recognised when control of the goods or services passes to the customer, at the amount the business expects to be entitled to, regardless of when the cash is received.
How it works
IFRS 15 and its US GAAP equivalent, ASC 606, use a five-step model: identify the contract, identify the performance obligations, determine the price, allocate it, and recognise revenue as each obligation is satisfied. For most small businesses this simply means revenue is booked when the goods are delivered or the service is performed.
Revenue is not the same as cash. A sale on credit is revenue now and cash later, while an advance from a customer is cash now and revenue later, held meanwhile as deferred revenue. VAT collected on sales is never revenue: it belongs to the tax authority. Revenue appears at the top of the income statement.
Example: a credit sale
A wholesaler delivers goods worth 12,000 plus 5% VAT on 30-day terms. It records revenue of 12,000 on delivery, VAT payable of 600 and a receivable of 12,600. When the customer pays, the receivable is cleared against bank; revenue does not change.
| Account | Debit | Credit |
|---|---|---|
| Trade receivables | 12,600 | |
| Sales revenue | 12,000 | |
| VAT payable (output VAT) | 600 |