Earned revenue is the income a company generates from delivering goods or providing services, recognized when the service or product is delivered. This concept is fundamental in accounting and finance, representing the cornerstone of revenue recognition.
Historical Context
The concept of earned revenue has evolved alongside modern accounting practices. Historically, revenue recognition principles were less standardized, but the development of frameworks like the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) has helped codify how and when revenue should be recognized.
Types of Earned Revenue
1. Product Revenue
Revenue from the sale of physical goods. Recognized when the goods are delivered, and ownership is transferred.
2. Service Revenue
Revenue from services provided. Recognized when the service is completed.
Key Events
- Revenue Recognition Principle Introduction: The formalization of revenue recognition principles under GAAP and IFRS.
- Adoption of ASC 606: In 2014, the Financial Accounting Standards Board (FASB) issued ASC 606, a standard providing a comprehensive model for revenue recognition.
Detailed Explanation
The recognition of earned revenue requires meeting specific criteria:
- Delivery of Goods or Services: The company must have fulfilled its obligation by delivering the product or completing the service.
- Fixed or Determinable Price: The sale price should be fixed or determinable.
- Collectibility: There should be reasonable assurance that payment will be collected.
Mathematical Models
Revenue Formula
Charts and Diagrams
graph TD;
A[Order Received] --> B[Goods/Services Delivered];
B --> C[Revenue Recognized];
Importance
Earned revenue is critical for:
- Assessing Company Performance: It reflects the actual income generated from core operations.
- Financial Statements: Accurate revenue recognition is essential for the integrity of financial reports.
- Investor Relations: Investors rely on revenue figures to gauge a company’s health and profitability.
Applicability
- For Businesses: Important for accurate financial reporting.
- For Investors: Provides insight into company performance.
- For Regulators: Ensures transparency and compliance.
Examples
Example 1: Retail
A retail store sells 100 units of a product at $50 each. Revenue is recognized when the products are delivered to customers.
Example 2: Service Industry
A consulting firm completes a project worth $20,000. Revenue is recognized upon project completion.
Considerations
- Timing: Revenue should be recognized when the delivery is made or service is rendered.
- Contracts: Specific terms in contracts may affect the timing of revenue recognition.
Related Terms
- Deferred Revenue: Revenue received but not yet earned.
- Accrued Revenue: Revenue earned but not yet received.
- Unearned Revenue: Payment received before delivering goods or services.
Comparisons
- Earned Revenue vs. Accrued Revenue: Accrued revenue is recognized before payment is received.
- Earned Revenue vs. Deferred Revenue: Deferred revenue is recognized after payment is received, but before services or goods are delivered.
Interesting Facts
- Revenue Recognition in Tech: In the software industry, revenue is often recognized over time as services are provided.
Inspirational Stories
- Tech Startup Success: A software company streamlined its revenue recognition processes, leading to clearer financial statements and attracting major investors.
Famous Quotes
- “Revenue is vanity, profit is sanity, but cash is king.” - Unknown
Proverbs and Clichés
- Proverb: “Don’t count your chickens before they hatch.” (caution in recognizing revenue too early)
Expressions, Jargon, and Slang
- Top Line: Another term for revenue.
- Rev Rec: Short for revenue recognition.
FAQs
Q1: When is revenue considered earned?
Q2: How does earned revenue affect financial statements?
References
- FASB Accounting Standards Codification (ASC) 606.
- International Financial Reporting Standards (IFRS).
- Generally Accepted Accounting Principles (GAAP).
Summary
Earned revenue represents the recognized income from delivered goods or completed services. It plays a critical role in financial reporting and business performance assessment, governed by standards like GAAP and IFRS. Understanding and accurately recognizing earned revenue is essential for businesses, investors, and regulators to ensure transparency and financial integrity.
