The income statement summarizes a company's revenues, expenses and profits for an accounting period. Revenue is a significant transaction that results in a cash flow now or in the future. Under the accrual accounting system, companies must record revenues when they are earned, regardless of whether or not cash exchanges hands.
Companies recognize revenues from sales of merchandise items and other products if the transactions meet certain conditions. These include persuasive evidence that a sales arrangement exists, the company has delivered products or rendered services, the price is fixed or determinable and there is reasonable certainty of receiving timely payment. For example, if a company sells computers and receives cash payment, it recognizes the revenue immediately. If it sells the computers on credit and expects the customer to pay the invoice on time, it also recognizes the revenue immediately.
Consulting fees, car maintenance, residential cleaning and legal fees are some of the service revenues on an income statement. In addition to the recognition criteria for product revenues, companies must be able to measure the completion stage and associated costs for providing the services. Several methods exist for recognizing service revenue, such as the specific and completed performance methods. Recognizing a sales commission on a product sale is an example of the specific performance method, which companies use when the service involves the completion of a single act. The completion method applies to complex services, which are not complete until the company completes the final task. For example, a tax accountant may recognize service revenue only when he completes a tax audit and submits his report.
Interest, royalties and dividends are examples of investment revenues. Companies usually treat these as non-operating items and list them separately after the operating income section on the income statement. Accounting rules specify when and how a company may record these revenues. The company may earn interest income from investments in Treasury bills and corporate bonds. It may earn royalty from leased oil and gas property, while it may receive dividends from subsidiaries or investments in public dividend-paying stocks.
Companies usually show the gross and net revenue balances separately on the income statement. Gross revenues represent the original amount on the invoice or the sales receipt. However, sometimes customers return defective or damaged products and request refunds. Companies assess these refund requests against established internal policies. Net sales are equal to the difference between gross sales and returns and allowances, which are reductions in the original selling price for defective products that customers agree to keep.