THE REVENUE TRANSACTION
The sale of goods or services to customers is called a revenue transaction. A revenue transaction usually involves an increase in an asset, such as cash or accounts receivable, to recognize the amount received or due from customers because of a sale of goods or services. Stockholders do not benefit to the full extent of the sales amount. Expenses related to the sale must be recognized as reducing or offsetting the impact of revenue transactions on stockholders’ equity. For example, an expense for the cost of the merchandise delivered to customers is subtracted from revenue to calculate the net benefit to stockholders. Revenues are measured by the monetary value of the assets received (or reduction of liabilities) in return for goods and services that are sold. The decreases in the assets associated with obtaining the revenues (e.g., the cost of the merchandise sold and the cost of wages during the period) are called expenses. The difference between the revenues of a period and the expenses associated with earning those revenues is called income if the revenues exceed the expenses or loss if the expenses exceed the revenues. The terms “revenues” and “income” should not be used interchangeably. If there are no distributions of income to the stockholders during a period, the Retained Earnings balance will increase by the amount of the income.
Recording Revenue Transactions Using Temporary Accounts
Up to this point, the revenues and expenses have been recorded using only asset and equity accounts. New accounts are now introduced in which the revenues and expenses are recorded and accumulated separately. The accounts are called temporary because they do not appear on the balance sheet. Thus, they must be eliminated whenever a balance sheet is prepared. Revenue and expense accounts come into being because of practical considerations. Imagine the nuisance if every time we recorded a sale we had to record the expense of making that sale....
Please join StudyMode to read the full document