Accounting: What is Revenue? Definition and Explanation

Revenue is one word that sounds good in accounting. It means money is coming into a business. Something any business owner would like. We will explain what revenue is, look at a formal definition, and determine how to calculate it and how to record it in the accounting books. 

example of accounting revenue

What is Revenue in Accounting?

Revenue is the money earned in a business for selling goods or services. Often it is called the top line. For example on an income statement, you have revenue coming in, less your expenses and then you get to income. Let’s reiterate that.

Accounting Revenue Definition

The formal definition for revenue is money earned or generated from selling goods or services.

Do not confuse revenue with income, earnings or profit. They are not the same thing as revenue.

How is Revenue Generated in Businesses? (A Beginner’s Example)

Imagine you are a plumber and sell $450 of your services. You’d record $450 as revenue.

Let’s try another. This time, you have a bakery that sells $300 of cupcakes for a wedding. If you guessed $300 of revenue, that’s right!

It’s really simple but let’s do one last example.

You are an auto dealer. You sell a car for $20,000, a pack of 6 oil changes for $200 and a pair of floor mats for $75. You’d record revenue of $20,275.

Alright, you are probably catching on by now.

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How to Calculate Revenue in Accounting

 Revenue is easy to calculate. Total the receipts for your services and goods. The above examples show just that. Revisiting again the auto dealer, you would add the following : (20,000+200+75). The sum of the goods and services equals $20,275.

How Do You Record Revenue in Accounting?

So now that we know how to calculate revenue, the next thing is to record it.  The normal balance for revenue is a credit balance.  Revenue transactions are recorded in the general ledger. The revenue account or accounts get totaled up and make their way to the trial balance. 

From the trial balance, revenue flows over and is mapped to the income statement. If you have a program like QuickBooks then you can just run an income statement and you will see revenue at the top.

Accounting Principles: Revenue Recognition – What You Should Know

We’ve mentioned it before but since we are talking revenue, it is worth mentioning the revenue recognition standard. To be compliant with accrual accounting, revenue is recognized when earned.

An example might help. Suppose you complete a plumbing job on July 31st and bill for $400. You get paid on August 30th. Under accrual accounting, you should recognize revenue on July 31st as the substance of the transaction is complete.   

You’d make the following journal entry on the 31st to recognize sales and the revenue earned but not paid.

July 31Accounts Receivable$400

Then the following entry would be made when you are paid.

August 30Cash$400
Accounts Receivable$400

List of Revenue Accounts: Ones You Should Know

There are a few main revenue accounts. Generally, you’ll see the following:

  • Sales – generated from goods or services.
  • Interest Revenue – generated from bonds or money market accounts that pay interest.
  • Dividends Revenue – generated from holding securities or investments.
  • Rent Revenue – gained by renting out a property, plant or equipment.

Key Point: Remember all revenue accounts have normal credit balances.

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Let’s Recap on Accounting Revenue

Revenue isn’t too difficult of a topic but let’s still cover the high points:

  • Revenue shows up at top of the income statement hence it is referred to as the “top line”.
  • It has a normal credit balance. Credits increase revenue and debits decrease it.
  • Revenue is not the same as income, profit or earnings.

What is Revenue? – Final Thoughts

It is simple. Revenue is what a business earns for selling goods or services. Overall, revenue isn’t hard to calculate and for many, it isn’t too difficult to wrap their head around. Make sure you get an understanding of revenue because you are going to need it for when we dive deeper into contra revenues. Questions? Drop them in the comments below. We love to hear from you!

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