How revenue affects the balance sheet
/What is Revenue?
Revenue is the total amount of income generated by a business from its normal operations, typically through the sale of goods or services. It represents the top line of the income statement, before any expenses are deducted. Revenue can be recognized when it is earned and realizable, regardless of when cash is received, in accordance with the accrual basis of accounting. It is a key indicator of a company’s financial performance and growth potential.
How Does Revenue Affect the Balance Sheet?
Revenue normally appears at the top of the income statement. However, it also has an impact on the balance sheet in three areas, which are on the reported levels of cash, accounts receivable, and stockholders’ equity. These impacts are as follows:
Impact on cash. If a company's payment terms are cash only, then revenue also creates a corresponding amount of cash on the balance sheet, net of any discounts granted to the customer.
Impact on accounts receivable. If the payment terms allow credit to customers, then revenue creates a corresponding amount of accounts receivable on the balance sheet. Or, if a sale is being made in exchange for some other asset (which occurs in a barter transaction) then some other asset on the balance sheet might increase.
Impact on stockholders’ equity. The increase in assets also creates an offsetting increase in the stockholders' equity part of the balance sheet, where retained earnings will increase. Thus, the impact of revenue on the balance sheet is an increase in an asset account and a matching increase in an equity account.