Revenue is the gross inflow of cash, receivables, or the other considerations which are arising in the ordinary course of business of an enterprise from the rendering of services, from the sale of goods, and from the use of the enterprise resources by others and generating interest, royalties, and dividends. Revenue is an amount which is charged by the person from the customers or clients when there is any supply of the goods and supply of the services rendered to them and the amount which is charged in the consideration of the use of resources by them. In an agency business, the amount of commission is considered as revenue.
Recognition of the revenue–
The amount of the revenue is recognized in the following manner in the following cases-
(i) Sale of Goods-in the case when there is any sale of goods and the seller will transfer the property in the goods to the buyer for the amount of consideration. There are situations when the seller does not transfer significant risks with the transfer of goods to the buyer, in such case the amount of revenue has to be recognized at the time of transfer of significant risks and rewards to the buyer i.e. when the seller will transfer the risk & rewards of such goods then the seller will recognize the amount of revenue. The amount of revenue that arises from the sale will be disclosed in the following manner-
Less: Excise Duty xxxx
The net amount of Turnover/Sale xxxx
(ii) Rendering of Services– When there is any revenue that arises from the rendering of the services then the amount of the revenue is usually recognized when the service is performed, either by the proportionate completion method or by the completed service contract method.
Proportionate Completion Method: According to this method the amount of the revenue recognizes in the statement of profit & loss proportionately with the degree/percentage of completion of each service.
Completed Service Contract Method: According to this method the amount of the revenue recognizes in the statement of profit & loss is only when the rendering of services under a contract is completed or substantially completed.
(iii) Interest, Royalties, and Dividends
Such revenues are recognized in the following manner-
Interest: The amount of Interest is recognized on the basis of time after considering the amount of outstanding interest. For Example: If the interest on the deposit is due on 30th June and 31st Dec and the company closes its books of accounts as on 31st March, the amount of interest for the period of Jan-March will be received in June, but we have to recognize such amount of interest as revenue in March.
Royalties: Royalty means the amount of consideration that is paid by the person for the use of patents, know-how, trademarks, and copyrights. The amount of royalties’ income has to be recognized on accrual basis and as per the terms of the relevant agreement.
For Example: If the amount of royalty which is payable on the basis of the number of copies of the book, then we will recognize such amount of royalties only on that basis.
Dividends: The amount of dividend has to be recognized when the owner has the right to receive such payment i.e. if there is no right to receive then we will not recognize such amount of revenue. The right to receive will arise only when the company declares the dividends on the shares and the directors actually decide to pay the dividends to their shareholders.