Revenue and other income Flashcards
What is income in the context of a business?
Income refers to the amount earned through the activities of a business.
It comprises revenue earned from selling goods and providing services and other income earned from other business activities.
When is revenue recognized according to the revenue recognition theory?
Revenue is recognized when goods are sold and delivered.
This applies to both sales revenue and service fee revenue.
What are sales returns?
Sales returns are amounts that reduce sales revenue due to customers returning goods.
They occur when goods are returned due to wrong specifications or defects.
How is net sales revenue calculated?
Net sales revenue = Sales revenue - Sales returns.
What is the purpose of the income summary account?
The income summary account is used only during the closing stage of the accounting cycle.
What happens to sales revenue and sales returns accounts at the end of each month?
Balances in the sales revenue and sales returns accounts are closed and transferred to the income summary only at the end of the financial year.
What is the double entry for recording sales revenue?
Dr Trade receivables (+ asset)
Cr Sales revenue (+ income).
What is the double entry for recording sales returns?
Dr Sales returns (- income)
Cr Income summary.
What is the recognition principle for service fee revenue?
Service fee revenue is recognized when services have been provided.
What is the situation with refunds in service businesses?
Refunds are less common in service businesses, and customers may not pay the full sum if dissatisfied.
How should service fee revenue received in advance be treated?
It should not be recognized until the services are provided, recorded as a liability.
What is the accrual basis of accounting?
Business activities that have occurred should be recorded in the relevant accounting period, regardless of cash transactions.
What happens to service fee revenue received in advance at the start of the next financial period?
The service fee revenue received in advance is reversed and increased as service fee revenue.
What are the effects of service fee revenue received in advance if not adjusted?
- Overstates service fee revenue
- Overstates profit
- Understates current liability.
How is other income recorded?
Other income is recorded in the same way as revenue when received.
When is other income recognized?
Other income is recognized when earned, not when received.
What is the double entry for recording other income?
Dr Cash at bank / Cash in hand (+ asset)
Cr Other income (+ income).
What should be done if other income is received but the service has not been provided?
The other income should be reduced, and the owing of service recognized as a liability.
What is the double entry for recording income received in advance?
Dr Other income (- income)
Cr Income received in advance (+ liability).
What happens to income receivable at the end of the financial period?
Income receivable is recorded as an asset and the amount to be received is recognized.
What is the double entry for recording income receivable?
Dr Income receivable (+ asset)
Cr Other income (+ income).
What happens to income receivable at the start of the next financial period?
Income receivable is reversed and decreases other income.
