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Definition of Revenue in Accounting Terms

Revenue is the recognition of a financial transaction that occurs in normal business operations. Companies earn revenue by selling goods and services to consumers or other businesses.

  1. Facts

    • Revenue is recognized differently under the accrual and cash basis methods of accounting. Under accrual accounting, revenue is recognized when transactions occur; cash basis accounting recognizes revenue when cash changes hands.

    Considerations

    • Most companies are required to use the accrual accounting method, meaning that all revenues should match the expenses incurred to earn the revenue. This is called the matching principle in accounting.

    Theories/Speculation

    • If companies recognize revenue that may be seen as questionable under current accounting methods, they must issue "disclosures" to inform outside stakeholders of their recognition method.

    Warnings

    • Manipulating revenue occurs when companies recognize revenue that is not earned from possible future sales. These tactics are illegal and carry severe civil and criminal penalties.

    Expert Insight

    • Revenue definitions and recognition methods are governed by the Financial Accounting Standards Board (FASB). FASB develops the Generally Accepted Accounting Principles (GAAP) companies follow when recording their financial transactions.

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