A company’s revenue comes from a variety of sources, including the sale of goods, interest on loans, and income from renting or leasing. Accountants first record revenue in informal accounting ledgers to track capital as it comes into the company. Information on ledgers is transferred to more formal, official financial statements. Income statements, balance sheets, retained earnings statements and statements of cash flows are the four basic types of financial statements affected by revenue sources.
When initially recorded, revenue increases stockholder equity and assets. Stockholder equity and assets are columns of the universal accounting equation: assets equal liabilities plus stockholder equity. When the revenue amount is added to the stockholder equity, it should be labeled with the source of the revenue to indicate the source of the funds.
The Revenue-Matching Principle
Recorded revenue is subject to the revenue-matching principle, which is a requirement of U.S. accounting legal requirements know as the Generally Accepted Accounting Principles, or GAAP. Under the revenue-matching principle, all revenues recorded on statements must be matched to the expenses incurred to produce the revenue. For example, revenue from an item sold must be matched to the expenses incurred creating the item and paying the salesperson that sold the item.
Revenue on Income Statements
Income statements report a company’s net profit or net loss for a specific time period. Revenue appears several times on an income statement. Income statements list revenue from sales and revenue from nonoperational transactions such as interest earned, investment or sales of stock shares. On the income statement, sales revenues are listed first, the cost of goods sold (from expense matching) is subtracted to reach gross profit. Accountants subtract operating expenses are from gross profit to reach income from operations. To reach net profit, accountants add revenue from sources other than sales, subtract expenses and, finally, subtract taxes.
Revenue on Balance Sheets
Revenue is reported in the stockholders’ equity column of the balance sheet. Balance sheets report revenue in two categories: paid in capital and retained earnings. Retained earnings are net income revenue amounts that the company leaders choose to keep at the end of the accounting time period. Paid in capital includes revenue from stockholders investments and any other excess investment funds. In most cases, revenue is also added to the assets column and recorded as cash.
- “Financial Accounting, Sixth Edition”; Jerry J. Weygandt, et al.; 2008
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