Sales


Definition

Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increase in equity, other than increases relating to contributions from equity participants (IAS 18).

Explanation

Sale Revenue is the gross inflow of economic benefits. It must not be netted off against expenses. Sale is generated through the ordinary activities of the business. Incomes generated through activities that are not part of the core business operations of the business are not classified as sale revenue but are classified instead as gains. For instance, sale revenue of a business whose main aim is to sell biscuits is income generated from selling biscuits. If the business sells one of its factory machines, income from the transaction would be classified as a gain rather than sale revenue.

Sale revenue is an increase in equity during an accounting period except for such increases caused by the contributions from owners (equity participants). Sale revenue must result in increase in net assets (equity) of the entity such as by inflow of cash or other assets. However, net assets of an entity may increase simply by further capital investment by its owners even though such increase in net assets cannot be regarded as sale revenue.

Sale revenue may arise from the following sources:

  • Sale of goods
  • Provision of services
  • Revenue from use of entity's assets by third parties such as interest, royalties and dividends.

Accounting for Sales

As sale results in increase in the income and assets of the entity, assets must be debited whereas income must be credited. A sale also results in the reduction of inventory, however the accounting for inventory is kept separate from sale accounting as will be further discussed in the inventory accounting section.

A sale may be made on cash or on credit.

Cash Sales

When a cash sale is made, the following double entry is recorded:

DebitCash
CreditSales Revenue (Income Statement)

Cash is debited to account for the increase in cash of the entity.

Sale Revenue is credited to account for the increase in the income.

Credit Sale

In case of a credit sale, the following double entry is recorded:

DebitReceivables
CreditSales Revenue (Income Statement)

The double entry is same as in the case of a cash sale, except that a different asset account is debited (i.e. receivable).

When the receivable pays his due, the receivable balance will have be reduced to nil. The following double entry is recorded:

DebitCash
CreditReceivables

Recognition of Sales

It may be confusing to identify the point when a sale occurs. Do we recognize sale when the goods are dispatched to customers, when the customer receives those goods, or when we receive the payment in respect of those goods? In case of sale of goods, sale is generally said to occur when the seller transfers the risks and rewards pertaining to the asset sold to the buyer. This generally happens when buyer has received the asset. The receipt of payment from the customer is not relevant to the recognition of sale since income is recorded under the accruals basis.