Revenue

What is Revenue

The revenue is gross cash received which would ultimately result in increase of equity other than contribution of share holders. it is very important to remember that revenues is only gross inflow whereas the profit is a net inflow, furthermore, the items like taxes and import duties are not form part of revenue because those amount are collected on behalf of Govt and will not result in an increase of equity.

What are Types of Revenue

There are many types of revenue ,however, the main categories of revenue are as under:

1. Sale of Good
2. Rendering Services
3. Commission
4. Interest
5. Royalties
6. Dividends

Revenue Measurement

Revenue is measured at fair value of consideration received or receivable. For example Mr. A sold a washing machine to B at USD 500 , where the market value of machine is 800 USD .The revenue recognized by Mr. A will be 800 USD being the fair value of washing machine instead of $ 500.

Revenue Recognition.

1. Revenue Recognition from Sale of Good

 revenue from the sale of good will be recognized when

1. Risk and reward of good has been transferred to buyer
2. Managerial control have been transferred to buyer
3. The amount of revenue can be measured reliably
4. it is expected that amount of revenue will be received

Examples of revenue recognition from sale of good

A is selling the washing machines on behalf of B for a fixed commission , where A has right to return the unsold washing machines to B without any penalty . in this case B will not recognized revenue as risk and reward have not been transferred to B.

A sold washing machines to B and did  issue an invoice to B of $ 500 subject to change as Mr. A has not yet calculated the imported cost on washing machine. in this case Mr. A will not recognized the revenue because the amount of revenue cannot measured reliably as this is subject to change.

2.Revenue Recognition from rendering Services

The revenue shall be recognized subject to following condition.

1. The amount of revenue can be measured reliably
2. it is expected that amount of revenue will be received
3. The extent of services rendered can be measured reliably.

Example of Revenue recognition from rendering Services

A need to install 100 Air condition at facility of Mr. B. At Balance sheet date all 100 Air condition are partly installed. An inspection by third party verified that all Air conditioner are partly installed and installation is vary in each single installation. in above stated situation the stage of completion of installation cannot be measured accurately, therefore no revenue will be recognized at balance sheet date.

3.Revenue Recognition from Interest, Royalties, Dividend

The revenue shall be recognized subject to following conditions

1. The amount of revenue can be measured reliably
2. it is expected that amount of revenue will be received
3. Interest revenues will be recognized on bases of effective interest Rate
4. Royalties revenue will be recognized on accrual bases
5. Dividend revenue is recognized on bases of share holder right to receive

Example of Revenue recognition from Royalties

Mr. has received 300,000 royalty for mining activity shall be carried out by Mr.B for expected output of 3000 tons in coming three year. in first the output is 100 tones.

 in this case the amount of revenue recognized will be 10,000 UDS because only 100 tones has bee extracted which form bases of accrual recognition.
per ton royalty = 300,000/3000 = 100 USD
100 tons Royalty= 100 tones * 100 = 10,000 USD

4. Revenue Recognition from Dividend Income

Mr.A has declared a dividend of $ 300 as on 30 September ,2014 per share however the payment shall be made at the end of next year i.e 31 December ,2015. in this case Mr B will recognized revenue as on 30 September ,2014 because has right to receive the dividend.