Accountancy Income Accounts, Income Accounts Accounting, Accounts Net Income

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Income Accounts
In accounting and financial analysis, Income Accounts are often referred to as the "top line" due to their position on the Income statement at the very top.

This is to be contrasted with the "bottom line" which denotes Net Income, which is revenues minus expenses.

In Business, Income Accounts or revenues (turnover in Europe) are Income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Some companies also receive Income from interest, dividends or royalties paid to them by other companies.

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Each account in the Anglo-Saxon chart is classified into one of the five categories:
Assets, Liabilities, Equity, Income and Expenses.

A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger.

Revenue may refer to business Income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in "Last year, Company X had revenue of $32 million." Profits or net income generally mean total revenue minus total expenses in a given period.

For non-profit organizations, annual revenue may be referred to as gross receipts. This revenue includes donations from individuals and corporations, support from government agencies, Income from activities related to the organization's mission, and Income from fund raising activities, membership dues, and financial investments such as stock shares in companies.

For government, revenue includes gross proceeds from Income taxes on companies and individuals, excise duties, customs duties, other taxes, sales of goods and services, dividends and interest.

In accounting and financial analysis, revenue is often referred to as the "top line" due to its position on the Income statement at the very top. This is to be contrasted with the "bottom line" which denotes Net Income, which is revenues minus expenses.


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Income Characteristics

In general usage, revenue is Income received by an organization in the form of cash or cash equivalents. Sales revenue or revenues is income received from selling goods or services over a period of time. Tax revenue is income that a government receives from taxpayers.

In more formal usage, revenue is a calculation or estimation of periodic income based on a particular standard accounting practice or the rules established by a government or government agency.

Two common accounting methods, cash basis accounting and accrual basis accounting, do not use the same process for measuring revenue. Corporations that offer shares for sale to the public are usually required by law to report revenue based on generally accepted accounting principles or International Financial Reporting Standards.

In a Double-Entry Bookkeeping System , revenue accounts are general ledger accounts that are summarized periodically under the heading Revenue or Revenues on an income statement. Revenue account names describe the type of revenue, such as "Repair service revenue", "Rent revenue earned" or "Sales".


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Business Revenue

Business revenue is Income from activities that are ordinary for a particular corporation, company, partnership, or sole-proprietorship. For some business such as manufacturing businesses and grocery stores, most revenue is from the sale of goods.

Service businesses such as law firms and barber shops receive most of their revenue from rendering services. Lending businesses such as car rentals and banks receive most of their revenue from fees and interest generated by lending assets to other organizations or individuals.

Revenues from a business's primary activities are reported as Sales, Sales revenue or Net sales. This excludes product returns and discounts for early payment of invoices. Most businesses also have revenue that is incidental to the business's primary activities, such as interest earned on deposits in a demand account. This is included in revenue but not included in Net Sales. Sales revenue does not include sales tax collected by the business.

A public company reports its total annual revenues based on its fiscal year. Public companies also report quarterly revenues. Internally, companies break revenue down by operating segment, geographic region, and product line.


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Revenue Recognition and Unearned Revenue

Standards vary as to when revenue should be recognized. The Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Concept 5 states that revenues should be recognized when they are “realized or realizable” and “earned”.

Revenues are “realized or realizable” when products are exchanged for assets (such as cash) or claims to assets (such as promises to pay). Revenues are “earned” when the entity has performed all duties necessary to the purchaser.

Often one of the two situations will arise but not both. If assets are received before revenue is earned, a liability account is created called Unearned revenue. An example of when this would happen is in the event of magazine subscriptions: suppose a company sold 12 month magazine subscriptions on July 1, 2005 for $10,000 cash. At the company's year end, December 31, the company is still obligated to deliver 6 months, or $5,000, worth of magazines to subscribers. In this case, the company would recognize $5,000 as revenue for 2005, and $5,000 would be seen in the liability account Unearned revenue.

A similar situation occurs when a property-casualty insurance enterprise receives premium at the start of the period insured. The insurer establishes an "unearned premium reserve" for the portion of the premium pro-rated for the unexpired portion of the policy period.

In general, for US GAAP purposes, revenue should be recognized at time of delivery of the goods or performance of the service. If cash is received prior to this time, revenue is unearned. If cash has not yet been received at time of performance, the asset account Accounts receivable is used to record the revenue. This is in contrast to IRS revenue recognition policies, which call for revenues to be recognized on a cash received basis. In the above magazine example, the company would have to pay taxes on $10,000 of "revenue" for 2005.


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Financial Analysis

Revenue is a crucial part of financial analysis. A company's performance is measured to the extent to which its asset inflows (revenues) compare with its asset outflows (expenses). Net Income is the result of this equation, but revenue typically enjoys equal attention during a standard earnings call.

If a company displays solid “top-line growth,” analysts could view the period's performance as positive even if earnings growth, or “bottom-line growth” is stagnant.

Conversely, high Income growth would be tainted if a company failed to produce significant revenue growth. Consistent revenue growth, as well as income growth, is considered essential for a company's publicly traded stock to be attractive to investors.

Revenue is used as an indication of earnings quality. There are several financial ratios attached to it, the most important being gross margin and profit margin. Also, companies use revenue to determine bad debt expense using the Income statement method.

Price / Sales is sometimes used as a substitute for a Price to earnings ratio when earnings are negative and the P/E is meaningless. Though a company may have negative earnings, it almost always has positive revenue.

Gross Margin is a calculation of revenue less Cost of Goods Sold, and is used to determine how well sales cover direct variable costs relating to the production of goods.

Net Income / Sales, or Profit margin, is calculated by investors to determine how efficiently a company turns revenues into profits.


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Business Tips

Some tips on how to avoid business failure:

  • Don't underestimate the capital you need to start up the business.

  • Understand and keep control of your finances - income earned is not the same as cash in hand.

  • More volume does not automatically mean more profit - you need to get your pricing right.

  • Make sure you have good software for your business, software that provides you with a good reporting picture of all aspects of your business operations.


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Important Note
Because the material covered here and other pages is considered an introduction to the topic of Accountancy and Accounting, there are many complexities not presented. You should always consult with a business accounting professional for assistance with your own specific circumstances.


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