Key elements from Financial statements
In the previous article, we saw line item wise listing of P&L statement. In this article, we shall see the revenue portion.
I. Revenue:
Revenue from primary operations
Other income
Revenue from operations
It is the revenue generated from an enterprise's principal revenue generating activities, which can be from sale of goods or provision of services or both. It is also called the 'Top line' item, It is called so, because income from sale/service is the first line item on an income statement.
what is revenue?
Revenue basically means income ie total money the business brings from engaging in its primary business activities and should not be confused with profit which is the final element arrived at after considering the total expenses.
So, What is primary business activity?
Refer to those activities from which the company generates more than half of or substantial part of the company's revenue. When an entity has more than 1 business activity, the primary activity in that case, refers to the one with the largest
gross receipts.
What is Gross receipts then?
Gross receipts means revenue without
deductions like operating expenses and discounts.
(a) For entity engaged in manufacturing operations: revenue is generated from sale of their manufactured/produced goods.
(b) For an entity engaged in trading: revenue id generated by the entity purchasing the goods/merchandise from the manufacturer and subsequently selling those goods at profit, without changing the form of the goods or making any value addition to the product.
They may be engaged in whole sale trade, retail trade, e-commerce trade (online sale).
(c) For an entity engaged in supply of services : revenue may be in the form of service charges, consultation charge, commission, or professional fees, that is charged by the service provider for the service the business provides.
Concepts pertinent to sales:
(1) Sales return: Sales is always reported net of returns during the period. RMA as it is called, is short form of Return material authorization, which is a process where a seller accepts a purchased item back from the consumer, subject to fulfilment of certain terms and conditions and either refunds the payment received or gives replacement for the product.
(2) Cut off point for sales recognition: for business engaged in sale of goods, the cut off point for income (sales) recognition depend on the agreed terms of contract, which by general standards is achieved when
(i) ownership of goods is transferred to the buyer (term used is ownership of
goods and not possession of goods)
(ii) for a price
In a domestic sale, sale can be either ex-works/ex-factory sales or delivery at door.
Ex-factory sales: means the seller (in this case the manufacturer) will make the goods available to the buyer, at the factory gate.
From there, the buyer will take the responsibility for the goods -right from loading the goods onto the truck/vehicle, transportation and unloading at the final destination.
In this case: the title, risk and physical possession of goods are all transferred to the buyer at the factory gate itself.
Delivered at buyer's place:
Seller bears the costs and risk associated with transporting goods to an
agreed address. Delivery is complete when the goods at the named address and
ready to be unloaded.
In this case, risk transfers from seller to buyer when goods are ready for
unloading at the agreed address
We shall continue with 'other income' part in next article