What is revenue? Recognition conditions and deductions
The business performance of each business is often evaluated based on revenue. So what is revenue ? What conditions and deductions should be kept in mind when recording this target? In the article below, 1C Vietnam will answer the above questions in detail.
1. What is revenue?
The concept of revenue is understood as the total amount of money that a unit or organization earns from selling goods and providing services in a certain period of time. Based on that, businesses can build reports to monitor business situation.
For businesses, revenue is a measure of scale and reproducibility, and is the basis for offsetting production costs and paying taxes to the State. At the same time, this target is also the final stage in the capital circulation process, creating a premise for the next production process.
In particular, each type of revenue with its own characteristics brings different important meanings to businesses, specifically:
- Sales revenue: Main source of revenue, greatly contributing to business profits.
- Financial revenue: Can contribute to increasing income for businesses.
- Internal revenue: Helps businesses make the most of available resources.
- Unusual revenue: Can help businesses compensate for losses in main business activities.
2. Distinguish between revenue, income and cash flow
Revenue, income and cash flow are three important terms, often mentioned in corporate finance. Although closely related to each other, the three concepts above actually have fundamental differences. Below is a detailed comparison table to help businesses clearly distinguish revenue, income and cash flow:
Element | Revenue | Income | Cash flow |
Concept | The total value of economic benefits that an enterprise receives in an accounting period, arising from the enterprise's production, business or service provision activities. | The difference between revenue and expenses during an accounting period. | The actual amount of money a business receives during an accounting period, including cash and accounts receivable. |
Characteristic | Involves businesses that provide products and services, and collect payments from customers. | Related to the profitability of the business. | Related to corporate liquidity and currency management. |
Time | Determined by the start and end time of the accounting period. | Determined after deducting all costs incurred during the accounting period. | Determined by day, month, year of receipt or payment. |
Critical level | Reflects total proceeds from product sales, service provision and other revenues. | Reflects actual profit, after deducting all costs. | Reflects the actual amount received or paid during the accounting period. |
Target | Overall assessment of the enterprise's business activities and future development trends. | Basis for calculating an enterprise's after-tax profit. | Evaluate liquidity and manage currency. |
For example | Businesses earn money from selling products and services to customers. | The after-tax amount is calculated after deducting production and operating costs. | Types of cash payments received from sales and payments to suppliers. |
3. Summarize the business's revenue sources
In addition to understanding what revenue is, companies also need to understand the basic classifications of this index to accurately assess the business situation. Based on origin, revenue is divided into 4 basic groups below:
Revenue type | Main characteristics | For example |
Revenue from sales | Is the amount of money obtained from selling products, goods or services to customers. | Revenue from selling mobile phone products and hotel accommodation services. |
Revenue from financial activities | Is income generated from activities including investing, lending capital, and trading bonds/stocks. | Income from interest from investment securities and interest from capital loans. |
Internal revenue | Is income generated from the provision of goods or services between units within the same company. | The parent company sells products to subsidiaries within the same group. |
Abnormal revenue | Revenue arises from irregular activities and is not related to the company's main business activities. | Income from asset liquidation and sale of unnecessary inventory. |
4. Simple revenue calculation method
4.1. The company provides services
The revenue of a service providing company is determined by the general formula:
Revenue = Service selling price x Number of customers
For example: A company providing tax consulting services has a service price of 10,000,000/contract. In July 2023, the company signed 10 tax consulting contracts. The company's revenue in July 2023 is:
Revenue = 10,000,000 x 10 = 100,000,000 VND.
Revenue from providing services to an enterprise is recognized when the following conditions are simultaneously met:
- Revenue is determined with high reliability.
- Transactions that provide services have the potential to bring economic profits.
- Calculate the amount of work completed on the balance sheet date.
- Determine the costs incurred during the service provision transaction and the costs to complete that transaction.
4.2. For product sales activities
The revenue of an enterprise when selling products is calculated according to the formula:
Revenue = Number of products sold x Product selling price
For example, if a company sells 100 items for 100,000 VND/product, the company's revenue is calculated as follows:
Revenue = 100 x 100,000 = 10,000,000 VND
Regarding recording sales revenue, for product sales activities, businesses need to simultaneously meet the following conditions:
- The buyer is responsible for most of the risks and benefits related to ownership of the goods. This condition shows that the business has transferred ownership of the goods to the consumer.
- There is no longer any management or control of the goods from the owner.
- Identify the costs associated with the sales transaction. To meet this condition requires businesses to have enough information to determine costs related to sales, including purchasing costs, shipping costs, insurance costs,...
5. Deductions for expenses incurred during the period
Cutting costs is one of the solutions to help businesses optimize resources and grow revenue. Below are 5 effective implementation methods that business units can refer to:
- Optimize procurement costs: Businesses should negotiate with suppliers to get the best prices. For service providing companies, using external units is also a way to save costs.
- Reduce production costs: Business organizations can recycle, liquidate or resell excess materials, while ensuring maximum use of space, production machinery and personnel.
- Choose lower financial costs: Companies should choose units that provide goods and services at competitive prices. In addition, businesses also need to pay attention to interest rates when borrowing capital.
- Cut unnecessary expenses: Businesses should continually look for ways to eliminate unnecessary expenses, such as ineffective advertising.
- Use timing strategy: Businesses should monitor business performance to determine the right time to sell. In addition, companies can also use online meetings to minimize travel costs.
6. Useful method of increasing revenue for businesses
In case you need to increase revenue, businesses can consider implementing the following useful and effective methods:
- Research competitors: Researching competitors will help businesses better understand the market and come up with appropriate strategies.
- Identify target customers: Accurately identify people with needs and ability to pay for the business's products and services, helping the company focus resources and time to reach and meet their needs. of customers, thereby increasing the likelihood of purchasing conversion.
- Increase purchase conversion rate: This is the ratio between the number of potential customers reached and the number of customers who actually make a purchase. To increase the purchase conversion rate, businesses need to improve customers' purchasing experience, offer preferential policies and attractive promotions.
- Increase the number of repeat purchases by customers: Loyal customers are those who regularly buy from the business. Businesses need to have promotional programs and classify customer groups to plan effective care to help retain these consumers.
- Receive feedback from customers: This is a valuable source of information that helps businesses improve products, services and customers' shopping experiences. Companies need to regularly listen and receive opinions from buyers to make appropriate adjustments.
- Motivate and treat employees well: Employees are the core force in an enterprise's business operations. Businesses need to create a good working environment and give employees adequate compensation so that they are motivated to work and contribute to the business.
Thus, understanding clearly what revenue is as well as how to properly record it helps businesses provide accurate information to stakeholders, serving business decision making. In addition, companies need to pay attention to deductions to ensure the honesty and accuracy of financial reports. To learn more useful information about corporate governance, don't forget to follow other articles on 1C Vietnam's website.