What Effect Does Revenue Have on the Accounting Equation?

The basic accounting equation requires that a company's total assets equal total debts plus total equity. Revenues have an incremental effect on the equation because they increase retained earnings, which ultimately feed into equity. In a financial glossary, "equity," "investor money," "shareholder capital" and "owner capital" mean the same thing.

The basic accounting equation addresses the fundamental issue that corporate finance personnel grapple with: solvency. Being solvent means having more resources -- also known as assets -- than debts. Net worth, a derivative term in solvency administration, equals total assets minus total obligations. The last term is interchangeable with debts, financial commitments or liabilities. A company's leadership heeds the organization's primary accounting equality to figure out what's going on with respect to solvency, to run efficient activities and to set in motion the operational wheels of debt reduction, expense management and sales growth.

Revenues come from the sale of goods, the provision of services and investment gains. Revenue management helps department heads phrase an organization's operational predicament in concrete terms, using prose that salespeople and marketing specialists can understand and work on. For example, if the business is experiencing a sales decline in one product category, segment managers may scout the competitive environment to understand customers' wants and needs, figure out what rivals are doing, establish proper benchmarking standards and right the business unit's ship. Benchmarking means understanding what a competitor is doing better, determining whether it's applicable to corporate activities and finding a strategically sensible way to adapt it to company operations.

Revenues are integral to a statement of profit and loss, also known as a statement of income. They increase a company's net income, the final result finance people get after deducting total expenses from total revenues. At the end of an accounting period -- say, a month, quarter or fiscal year -- financial managers close books and transfer net income into the retained earnings master account, which is an equity item. As a result, higher revenues increase equity and thus the entire accounting equation because income ultimately translates into cash, which is an asset.

Operating revenues and the primary accounting equality affect the whole financial reporting gamut. Revenues make it into a P&L -- the other name for a statement of profit and loss -- alongside expense accounts as diverse as material expense, salaries, administrative costs, depreciation and interest. Assets and liabilities -- the first side of the accounting equation -- are part of a balance sheet, also referred to as a statement of financial position.