An RA account is a critical tool for any business operation. After all, the goal of doing business is to generate profit, and to generate profit, the company needs to generate revenue. Among all the bank accounts used by a business, an RA bank account is among the most important because this is where the business’s income goes.
TL;DR (Too Long; Didn't Read)
The RA financial meaning is "revenue account", an account where a company's revenue is held.
What Is an RA Account?
A revenue account is not a simple savings or checking account. It is a designated secure account into which income is deposited in the form of physical checks or electronic deposits. The balance of a company’s revenue account (or revenue accounts in large companies that have multiple revenue accounts) is an important part of the formula used to determine whether the company is “in the black”, meaning it is profitable, or “in the red", meaning the company is operating at a deficit.
Revenue’s Role in Business Accounting
Revenue is not the same as profit. Profit is defined as the financial gain a company experiences after paying all operational expenses like rent and utilities, operating expenses and employee salaries. Revenue, on the other hand, is the income the company brings in before paying these expenses. Some of the revenue that comes into an RA account eventually becomes profit, but a significant amount of it is diverted to other accounts to cover the business’s expenses.
Tracking revenue accurately is key to success. A revenue account enables the business to do so because by tracking this account’s activity, the business’s accounting team can see exactly how much money comes in, from where the money comes, how much money leaves the account and where the money goes. Tracking revenue enables the company to assess its current financial strategies and develop more effective ones that reduce expenses and use revenue more efficiently, increasing the company’s profits.
A company's recorded revenue can come from a variety of sources. These sources include:
- Sale of products
- Sale of services
- Investment interest
- Franchise fees
Purpose of an RA Account
A revenue account makes it possible for a company to track revenue received precisely. With this figure, the company can make data projections about potential future revenue, compare actual revenue received against the amount of revenue it expected to bring in, resolve discrepancies in other accounts and check banking records related to revenue.
A company's net income, the amount of money it has in its revenue account after all business expenses have been deducted, is stated in its income statement. Companies may issue income statements monthly, quarterly or annually.
Other RA Account Purposes
Another important use of an RA bank account is giving the company a large supply of liquid cash. In scenarios where the company needs a lot of cash on hand, like when unexpected consumer demand for its products means it needs to buy lots more product from its supplier or an unexpected legal issue means the company’s leadership team needs to hire lawyers and head to court, the revenue account is that cash on hand.
Expenses paid out of revenue accounts include but are not limited to:
- Wholesale inventory
- Business supplies
- Operational expenses like utilities and rent
- Employee compensation and bonuses
- Business taxes
- Consulting costs
Other Kinds of Accounts Used in Business
Revenue accounts are far from the only accounts used in business. These other types of accounts interact closely with a company’s revenue accounts. Other accounts often used in commercial operations include:
- Expense accounts
- Undeposited funds accounts
- Equity accounts
- Accounts payable
- Accounts receivable
- Liabilities account
- Cost of goods account
- Assets account
A company might have one of each of these accounts to cover all of its operations, or it might have one of each kind of account per department. For example, a large company might have an operations account and an expense account for its IT department as well as an operations account and an expense account for its marketing team.
Accounts payable is the account that covers all outstanding invoices from other accounts, like a bill from a business consultant that has not yet been paid. Accounts receivable is the inverse; it is the account that lists all the invoices the company has issued that have not yet been paid. Once the invoices in accounts payable are paid, money goes from the revenue account to the recipient, and when the company receives payment for the invoices in its own accounts receivable account, that money heads into its revenue account. Closely tracking these accounts makes it possible to ensure that all invoices are paid and received on time.
Using Contra Accounts
A contra account is the opposite of an RA account. This type of account is used to track a business’s financial losses, such as discounts and promotions the company offers. In a contra account, a transaction’s original cost is recorded alongside the reduced amount to show the net “loss” to the company.
For example, a company might offer a promotion allowing nonprofit organizations to buy software that typically costs $50,000 for only $20,000. In the contra account, the software company records the difference of $30,000 “lost” when nonprofit organizations buy the software.
Contra accounts are also where a company records its returned revenue. For example, if a product is returned to a store and the store issues a refund for the product, that refund is recorded as a loss of revenue. The original sale is canceled, and the revenue from that sale is reversed in the company’s accounting records.
Revenue Accounts Within Organizations
How a revenue account is used depends largely on the size of the organization using it. In many small businesses, there is only one RA account. When a business has only one RA account, it is the sole account where all revenue is stored. In contrast, most larger companies have multiple revenue accounts. Depending on how the business is organized, there might be a revenue account for each department or different revenue accounts for different sources of revenue.
For example, a company might have different revenue accounts for e-commerce revenue and in-store revenue. This type of arrangement is commonly seen in companies that have multiple revenue streams, such as a property management company that owns some of its buildings and earns income from both rent and property management services offered to other landlords. Many companies also have investments serve as income streams, and because this is a much different kind of income than income from the sale of products and services, companies that earn revenue through investments often designate separate investment revenue accounts.
Revenue accounts play a critical role in planning future business strategies and projecting business growth. Revenue projections and their increased percentages enable a company to chart expected income in the coming years, which in turn can help it calculate increased operational costs and determine strategies to meet these costs. From projected revenue and expenses, a business can project future profit.
Lindsay Kramer has been a full-time writer since 2014. In that time, she's experienced the ups, downs and crazy twists life tends to take when you're launching, building and leading a small business. As a small business owner, her favorite aspect about writing in this field is helping other small business owners and aspiring entrepreneurs become more fluent in the terminology and concepts they face in this role. Previously, she's written on entrepreneurship for 99designs and covered business law topics for law firms.