Define revenues and expenses?

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Q. Define revenues and expenses?

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Concept understanding — Examples of Revenue

Examples of Revenue — A First Look

Think about the last time you bought a chocolate. The shopkeeper gave you the chocolate, you paid ₹10. For the shopkeeper, that ₹10 is revenue — the money earned from selling goods. Now think about a tutor who teaches you maths. When you pay the tutor ₹500 at the end of the month, that ₹500 is also revenue — but this time from providing a service.

That's the everyday intuition: revenue is the money a business earns from its main activities. But in Accountancy, we need to be precise.

What Exactly Is Revenue?

Revenue is the gross inflow of economic benefits (cash, receivables, or other assets) arising from the ordinary activities of a business. Ordinary activities are what the business is set up to do — selling goods for a trading firm, providing services for a service firm, or earning interest for a bank.

Important

Revenue is not the same as profit. Profit = Revenue − Expenses. Revenue is the top line; profit is what remains after costs.

Why Does Revenue Matter?

Revenue is the lifeblood of any business. Without it, a business cannot survive. In accounting, revenue determines:

How much tax the business pays
Whether the business is growing or shrinking
The amount of profit or loss reported in the Income Statement

For a Class 12 student, understanding revenue is the foundation for preparing the Trading and Profit & Loss Account — the statement that shows business performance.

Common Examples of Revenue

Here are the most important examples you'll encounter:

Type of Business	Example of Revenue	Description
Trading firm	Sale of goods	Selling inventory at a price higher than cost
Service firm	Fees received	Income from providing services (e.g., legal fees, tuition fees)
Manufacturing firm	Sale of finished goods	Revenue from selling products made by the business
Bank	Interest income	Interest earned on loans given to customers
Any business	Commission earned	Income earned for facilitating a transaction between two parties
Any business	Discount received	(This is actually not revenue — it reduces cost, but many students confuse it)

Watch out

Discount received is NOT revenue. It is a reduction in the cost of purchases. Revenue always involves earning from outside parties, not saving on what you buy.

Accounting Treatment of Revenue

When revenue is earned, two accounts are affected:

Debit: Cash/Bank A/c (if received immediately) or Debtors A/c (if credit sale)
Credit: Revenue account (e.g., Sales A/c, Fees Received A/c, Interest Income A/c)

Example 1: Cash Sale of Goods

A trader sells goods worth ₹20,000 for cash.

Account	Debit (₹)	Credit (₹)
Cash A/c	20,000
To Sales A/c		20,000

Explanation: Cash comes in (debit the asset), and revenue is earned (credit the income account).

Example 2: Credit Sale of Services

A consultant provides services worth ₹15,000 on credit.

Account	Debit (₹)	Credit (₹)
Debtors A/c	15,000
To Fees Received A/c		15,000

Explanation: The right to receive money (debtor) is created, and revenue is recognised even though cash hasn't arrived yet.

Example 3: Interest Earned by a Bank

A bank earns ₹50,000 interest on loans.

Account	Debit (₹)	Credit (₹)
Cash/Bank A/c	50,000
To Interest Income A/c		50,000

Revenue in the Trading and Profit & Loss Account

Revenue appears on the credit side of the Trading and Profit & Loss Account. Here's a simplified format: …

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Revenues are the amounts a business earns from its regular operating activities during an accounting period — chiefly the sale of goods or rendering of services — together with incidental earnings such as rent received, commission received, interest received and dividends. They increase the owner's equity.

Expenses are the costs incurred by a business to earn that revenue during the period — the value of resources used up. Examples are cost of goods sold, salaries, wages, rent paid, electricity, depreciation and interest paid. They decrease the owner's equity.

Basis	Revenue	Expense
Meaning	Amount earned from operations/other sources	Cost incurred to earn revenue

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Revenue = the gross inflow a firm earns from its normal activities (sales of goods/services) plus items like rent, commission, interest and dividend received. Expense = the cost of goods and services used up to earn that revenue (cost of goods sold, salaries, rent, depreciation, interest). Revenue raises capital; expense reduces it, and Revenue − Expenses = Profit.

Revenues

Revenue is the amount received or receivable by a business from its ordinary operating activities. Its main component is the sale of goods or the rendering of services to customers. In addition, a business earns revenue from other regular sources such as rent received, commission received, interest received, royalty and dividends. Revenue is recognised when it is earned, whether or not cash has yet been received.

Expenses

An expense is the cost incurred by a business in the process of earning revenue — the value of assets or services consumed during the accounting period. Because these resources are used up to generate revenue, their cost is charged against that revenue in the same period.

Item	Classified as	Examples
Revenue	Income (increases capital)	Sales ₹80,000, Rent received ₹5,000, Commission received ₹2,000, Interest received
Expense	Cost (decreases capital)	Cost of goods sold, Salaries ₹12,000, Rent paid, Depreciation, Interest paid

Accounting treatment

Revenue accounts are credited when income is earned, because income increases the owner's capital (Credit the increase in income). At the year end all revenue accounts are transferred to the credit side of the Trading and Profit & Loss Account.
Expense accounts are debited when a cost is incurred, because an expense decreases the owner's capital (Debit the increase in expense). At the year end all expense accounts are transferred to the debit side of the Trading and Profit & Loss Account.

Example entries: …

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Q.Define revenues and expenses?

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