Definition: Revenue, also called a sale, is an increase in equity related to the sale of a product or service that earned income. In other words, revenue is income earned by the company from its business activities. There are many different types of revenues including product sales, consulting fees and other services, rent, and even commission based fees. Any type of income that is earned from business operations is considered to be a revenue.
What Does Revenue Mean?
The revenue account is a temporary equity account that increases total equity in the company. This means that the revenue account has a credit balance and is closed at the end of each accounting cycle to a permanent or balance sheet account. This makes sense because the revenue account is supposed to record the income earned in the current period.
It’s doesn’t consist of a cumulative balance of all earnings in the company history. Thus, all prior period earnings must be removed from the account, so the balance only reflects the current year’s earnings.
In a corporation, revenues are closed to the retained earnings; where as, a partnership closes revenues to the partners’ capital accounts. In both cases the revenue account is closed to a permanent equity account on the balance sheet.
Revenues are recorded when income is earned not necessarily when the cash is collected from the sale. This is consistent with the accrual basis of accounting. Let’s take a look at an example.
Aaron’s Body Shop repairs cars for local auto dealers. Aaron is currently working on a fender repair for Bill’s Auto Lot. After Aaron finishes the repair, he sends Bill a $1,000 invoice for the labor and records the sale in his accounting system by debiting accounts receivable and crediting revenues.
Aaron records the income because he performed the work and has earned the revenue even though Bill hasn’t actually paid Aaron yet.