Revenue

Topics

1-01 Revenue & the accounting equation

Revenue 1-02
1-03
Income & revenue
Importance of revenue
2-01 Revenue recognition & measurement
3-00 Sources of revenue
3-01 Sale of goods
3-02 Rendering of services
3-03 Use of company’s assets
Anil J N Shukla
Chong Eng Heng
Tan Kai Guan, Clement
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Revenue 1-01 Revenue & the Accounting Equation

Topics (continued) Assets = Liabilities + Equity

4-01 Sale on credit Share Retained Other

5-01 Sales paid by credit card Capital + Earnings + Reserves
6-01 Sales returns and allowances
Ending
7-01 Collection on behalf of 3rd parties Begin Retained
Earnings + Net Income - Dividends = Retained
8-01 Principal vs. agent Earnings
9-01 FRS 115 - The new revenue accounting standard
Revenue - Expenses +/ - Other Gains/Loss

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 1-01 Revenue & the Accounting Equation 1-02 Income & Revenue
Income

Revenue - Increase in economic benefits

- Encompasses both revenue & gains
Revenue
- +
- arises in the course of ordinary activities of an
Debit Credit enterprise
Gains

- represents other items

- normally does not involve an “earning process”
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1-02 Income & Revenue 1-02 Income & Revenue

Revenue when car dealer sells cars in the ordinary Gains when car dealer sells its furniture etc. as
course of its business sale is not part of its ordinary business

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 1-02 Income & Revenue 1-03 Importance of Revenue
Revenue
Income = Revenue + Gains

- Economic engine of the business

- No revenue no profits
Revenue is the gross inflow of economic benefits - No profits, company not viable in long run
during the period arising in the course of the
ordinary activities of an entity when those
inflows result in increases in equity, other than
increases relating to contributions from equity
participants. (FRS 18:7)

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1-03 Importance of Revenue 1-03 Importance of Revenue

Google’s share price vs revenue
Revenue Growth

- Indicates demand for company’s goods and service

- Indicates possible increase in future net profits
Share Price
- Instills confidence in stakeholders like employees,
investors etc.
Revenue
- Stakeholders more likely to support company

2010 2011 2012 2013 2014

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 1-03 Importance of Revenue 1-03 Importance of Revenue

Side Note:

Alternative ways to increase profits X Ltd

- Reduce cost - however, cost cutting will harm the

business after a point.

X X
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1-03 Importance of Revenue 2-01 Revenue Recognition & Measurement

Side Note: Two main issues

Alternative ways to increase profits

- Reduce cost - however, cost cutting will harm the One Two
business after a point.
- Increase other income - however, as other income is When should revenue be How much revenue
unlikely to recur on a regular basis, profits tend to recognised? should be recognised?
fluctuate.
Recognition Measurement

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2-01 Revenue Recognition & Measurement 2-01 Revenue Recognition & Measurement

Recognition Recognition

The process of incorporating an item in the

For an item to be recognised
balance sheet or income statement
- It must meet the definition of an element
- Amount can be measured reliably
- Inflow/outflow of economic benefit is probable

Element = Assets, liabilities, Equity, Income, Expenses

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2-01 Revenue Recognition & Measurement 2-01 Revenue Recognition & Measurement
Realised/
Recognition Realisable

When? The process of converting non-cash resources and

rights into money
Realised/
BOTH Earned
Realisable

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 2-01 Revenue Recognition & Measurement 2-01 Revenue Recognition & Measurement
Realised/ Realised/ Realisable
Realisable

- Realised: when goods or services are exchanged

for cash or claims to cash e.g. cash, accounts
receivable
- Realisable: when assets received are readily
convertible to known amounts of cash or claims
to cash e.g. shares of blue chip company

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2-01 Revenue Recognition & Measurement 2-01 Revenue Recognition & Measurement
Earned

Earned

- When an entity has substantially accomplished what

it must do to be entitled to the benefit represented
by the revenue
i.e. when the earning process is complete or virtually
complete

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 2-01 Revenue Recognition & Measurement 3-00 Sources of Revenue

Revenue can arise from the

Measurement
3-01 Sale of Goods
Revenue should be measured at the fair value of the
3-02 Rendering of Service
consideration received or receivable
3-03 Use by others of the entity’s assets resulting in
Illustration
- Interest
ABC Ltd sold goods worth $1,000 and agreed to give the - Royalty
customer a discount of $100. Revenue = $900 - Dividend received

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3-01 Revenue from Sale of Goods 3-01 Revenue from Sale of Goods
Transfer of risk
Meet all 5 conditions

1 2 3

No managerial Revenue
Transfer of Risks
Control measured
& Rewards
reliably

4 5

Economic inflow Cost measured

probable reliably

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3-01 Revenue from Sale of Goods 3-01 Revenue from Sale of Goods
Transfer of rewards No managerial involvement & Control

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3-01 Revenue from Sale of Goods 3-01 Revenue from Sale of Goods
Reliably measure revenue Inflow of economic benefits

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 3-01 Revenue from Sale of Goods 3-01 Revenue from Sale of Goods
Reliably measure costs
Revenue from sale of goods is realised/realisable and earned
at:

Before completion of
Point of delivery
production
(most common case)
(e.g. construction
contract)

Point of production
(e.g. agricultural After delivery
produce)
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3-01 Revenue from Sale of Goods 3-01 Revenue from Sale of Goods

Point of delivery Before completion of production (e.g. construct contract)

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 3-01 Revenue from Sale of Goods 3-01 Revenue from Sale of Goods
After delivery
Point of production (e.g. agricultural produce)

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3-01 Revenue from Sale of Goods 3-01 Revenue from Sale of Goods
ABC Ltd sold $1,000 of merchandise for cash
Illustration Side Note:

When recording the sale of goods one must also

Journal Entry:
remember to record the removal of goods sold from
inventory
Dr. Cash $1,000
Cr. Revenue $1,000 Journal Entry: Cost of merchandise sold $500

Assets = Liabilities + Equity Dr. Cost of Goods Sold $500

Cr. Inventory $500
Cash $1,000 Revenue $1,000
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3-02 Revenue from Services 3-02 Revenue from Services
Illustration ABC Ltd provides consulting services for $10,000 in cash.

Generally Recognised when it is

Journal Entry:
Realised/
Earned Dr. Cash $10,000
Realisable
Cr. Revenue $10,000

Assets = Liabilities + Equity

Cash $10,000 Revenue $10,000

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3-02 Revenue from Services 3-02 Revenue from Services

Stages of completion
Outcome estimated reliably when all

Amount
Economic inflow
measured
probable
reliably

Stages of
completion
Cost measured
reliably } Stages

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 3-02 Revenue from Services
Stage of completion
Contract
Survey of work performed
price
3-02 Revenue from Services
Stages of completion
On 1st Jan ABC Ltd entered into an agreement to
Work performed provide monthly consulting services for an
Illustration
x annual fee of $12,000. ABC Ltd will record the
Total work following journal every month.

Services performed to date as a Contract Hours completed Journal Entry:

percentage of total services to be x
price Total project Dr. Accounts receivable $1,000
performed hours
Cr. Consulting revenue $ 1,000
The proportion that costs
Cost to date =
incurred to date bears to the Contract Assets Liabilities + Equity
x
estimated total costs of the price
Total cost
transaction Accounts rec $1,000 Consulting rev $1,000
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3-02 Revenue from Services 3-03 Use of Company’s Assets by Others

Stages of completion
Use by others of the entity’s assets resulting in
Services performed to date as a percentage of total
- Interest
services to be performed
- Royalty
- Dividend received
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

$1000 $1000 $1000 $1000 $1000 $1000 $1000 $1000 $1000 $1000 $1000 $1000 $12,000

Consulting revenue per annum: $12,000

Consulting revenue per month: $12,000 x 1/12 = $1,000
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 3-03 Use of Company’s Assets by Others 3-03 Use of Company’s Assets by Others

General recognition principle applies: Interest Received/Receivable

Recognise only if $ $

- Inflow of economic benefit is probable; and ABC Ltd Deposit BANK

- Amount can be measured reliably

Interest

$ $

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3-03 Use of Company’s Assets by Others 3-03 Use of Company’s Assets by Others
Interest Received/Receivable
Interest Received/Receivable On 1st Jan ABC Ltd deposits $12,000 in the bank.
Illustration Interest rate is 10% per annum. ABC Ltd will
- From use of cash/cash equivalents
record the following journal every month.

- Recognised using the effective interest rate method Journal Entry:

Dr. Interest receivable $100

Cr. Interest income $ 100
Note:

Assets = Liabilities + Equity

The effective interest rate method will be covered
under bonds Interest rec $100 Interest inc $100
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 3-03 Use of Company’s Assets by Others 3-03 Use of Company’s Assets by Others
Interest Received/Receivable
Royalty
- From use of long term assets e.g. copyrights,
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
patents, trademarks etc.

$100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 - Recognised on an accural basis in accordance
with the terms of the contract
Interest income per annum: $12,000 x 10% = $1,200

Interest income per month: $1,200/12 = $100

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3-03 Use of Company’s Assets by Others 3-03 Use of Company’s Assets by Others
Royalty
ABC Ltd licenses its internally developed
Royalty License use
technology to XYZ Ltd for use in its iMusic player.
of Illustration ABC Ltd receives $0.10 royalty for each iMusic
Technology player sold by XYZ Ltd. In 2015, 10,000 players were
sold. ABC will record the following journal entry.
ABC Ltd XYZ Ltd
Journal Entry:
Royalty
Dr. Royalty receivable $1,000
Cr. Royalty income $ 1,000
$ $
Assets = Liabilities + Equity

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Royalty rec $1,000 56
Royalty inc $1,000
 3-03 Use of Company’s Assets by Others 3-03 Use of Company’s Assets by Others

Dividend Received/ Receivable Dividend Received/Receivable

- From profit distribution on equity investments Investment

in shares
- Recognised when shareholder’s right to receive ABC Ltd XYZ Ltd
payment is established
Dividend

Note:
$ $
Dividend paid will be discussed in the lecture on
equity as will shareholder’s right to receive payment
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3-03 Use of Company’s Assets by Others 4-01 Sales on Credit (On Account)
Dividend Received/Receivable
ABC Ltd purchased 10,000 shares in XYZ Ltd. During
the year, XYZ Ltd declared dividends of $0.10 per Allows customers to pay for their purchases at a later
Illustration date.
share. ABC Ltd will record the following journal
when it’s right to receive payment is established.
A kind of financing
Journal Entry:

Dr. Dividend receivable $1,000

Cr. Dividend income $ 1,000
Assets = Liabilities + Equity

Dividend rec $1,000 59

Dividend inc $1,000 60
 4-01 Sales on Credit (On Account) 4-01 Sales on Credit (On Account)
Read As: Two ten, net thirty
These customers may be offered a sales discount
(discount allowed) to encourage them to make early
2 / 10 , n / 30
payment for their purchases.

Also called prompt payment discount Days of

% of discount Number of days credit
Otherwise
Read As: Two ten, net thirty if payment in discount full sales period i.e.
made within period amount is payment
discount due after
due
2 / 10, n/ 30 period date of
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4-01 Sales on Credit (On Account) 4-01 Sales on Credit (On Account)
On January 6, ABC Ltd sold $1,000 of If payment is received after discount period
Illustration Illustration
merchandise on credit with terms of 2/10, n/30 ends i.e. 16th January. ABC Ltd will pass journal

Journal Entry: Journal Entry:

Dr. Accounts Receivable $1,000 Dr. Cash $1,000

Cr. Revenue $1,000 Cr. Accounts Receivable $1,000

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 4-01 Sales on Credit (On Account) 4-01 Sales on Credit (On Account)
If payment is received before discount period
Illustration
ABC Ltd ends i.e. 16th January xx

Profit or Loss Statement

Journal Entry:
Year
Description
$
Dr. Cash $980
Revenue $1,000
Dr. Sales Discount $20
Cr. Accounts Receivable $1,000

Revenue should be measured at the fair value of the S1,000 x 2% = $20 discount received
consideration received or receivable S1,000 - $20 = $980 Contra revenue
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4-01 Sales on Credit (On Account) 5-01 Sales Paid by Credit Card
ABC Ltd Companies accept credit cards for several reasons:
Profit or Loss Statement
-To increase sales.
Year
Description
$ -To avoid providing credit directly to customers.
Revenue $1,000 -To avoid losses due to bad debts.
Sales Discount ($20)
-To receive quicker payments.
Net Revenue $980

Revenue should be measured at the fair value of the

consideration received or receivable
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 5-01 Sales Paid by Credit Card 5-01 Sales Paid by Credit Card

CREDIT CARD COMPANY On January 19, ABC Ltd sold goods for $3,000
Illustration and accepted payment via a credit card. The
credit card company charges a 2% service fee.

PAYMENT
PAYMENT
MINUS FEE
Dr. Account Receivable (Credit Card Co.) $2,940
CC PAYMENT Dr. Credit Card Discount/ Expense $60
Cr. Revenue $3,000
SELLER BUYER

GOODS & May be reported as Contra revenue or a selling expense

SERVICES
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5-01 Sales Paid by Credit Card 5-01 Sales Paid by Credit Card
ABC Ltd Alternatively
Profit or Loss Statement ABC Ltd
Year Profit or Loss Statement
Description
$
Revenue $3,000 Description Year
$
Credit Card Discount ($60) Revenue $3,000
Net Revenue $2,940
Cost of Goods Sold XXX

Gross Profit XXX

Selling Expenses $60

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 6-01 Sales Returns & Allowances 6-01 Sales Returns & Allowances
X Ltd returned $500 worth of goods purchased
Illustration
from ABC Ltd

Sale returns are made for

Journal Entry:

Damaged Goods Other reasons Dr. Sales Returns $500

Cr. Accounts Receivable $500

Contra revenue
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6-01 Sales Returns & Allowances 07-01 Collections on behalf of 3rd Parties

ABC Ltd
Profit or Loss Statement During a sales transaction an entity may collect
Year cash on behalf of a 3rd party
Description
$
Revenue $3,000 - Amount collected is not Entity’s revenue
Sales return and allowances ($500)
Net Revenue $2,500 - To be treated as a payable to the 3rd party

- GST is collected on behalf of the government

Revenue should be measured at the fair value of the
consideration received or receivable
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 07-01 Collections on behalf of 3rd Parties 07-01 Collections on behalf of 3rd Parties
Net selling price inclusive of GST
ABC Ltd invoiced its customer $100 plus 7%
Illustration
GST for services provided ABC Ltd What is the amount
Sales Invoice of revenue that ABC
Journal Entry:
Date: 30/6/2015 Ltd will record in
Dr. Accounts Receivable $107 its Income
Service Rendered $50.00
statement?
Cr. GST payable $ 7 Total inclusive of GST $50.00
Cr. Revenue $ 100 $50 - $3.27 = $ 46.73
GST @7% $3.27
Assets = Liabilities + Equity
Cash Paid $50.00 $46.73 x 7% = $3.27
A/R $107 GST payable $7 Revenue $100
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07-01 Collections on behalf of 3rd Parties 07-01 Collections on behalf of 3rd Parties
XYZ Ltd invoiced its customer $50 (inclusive of
Illustration
GST 3.37) for services provided
Why 46.73?
Journal Entry:
Amount of revenue recorded in the income
statement should be the cash equivalent sales price, Dr. Cash $50
excluding amounts collected on behalf of third Cr. GST payable $ 3.27
parties.
Cr. Revenue $ 46.73

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 8-01 Principal or Agent 8-01 Principal or Agent
How much should a travel agency report as revenue? How much should a travel agency report as revenue?

What is the Travel Agents Revenue ?

Airline

?
0
$10
Customer $250 Travel Agent
$1
0 0
Hotel
$250 Collection or $50 Remainder

Travel Agent collects $250 and pays $200 leaving $50 Depends - Agent $50 or Principal $250

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8-01 Principal or Agent

Principal: Exposure to significant risk & rewards
Agent: Not exposed to significant risk & rewards

Principal: Agent: End of Revenue

- Primary responsibility - Fixed fee
- Inventory Risk - % of invoice amount
- Can determine price
- Bears customer risk
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