How To Compile Revenue Accounts
Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
What you will need
- the trial balance
- the ledger (all divisions)
- details of end of year adjustments to the accounts, such as depreciation, bad debts, closing stock
- the journal.
Adjustments before you start
You will need to adjust the trial balance for various end of year adjustments. Remember to enter all your adjustments into the trial balance twice, once on the debit side and once on the credit side. You can achieve the same effect by adding to and subtracting from the same side as, indeed, you would need to with accruals and prepayments. For a prepayment for example, you would debit ‘prepayments’ in the trial balance, and subtract the same amount from the debit balance of the expense account concerned, e.g. ‘insurance’. Check that the trial balance still balances after you have adjusted it: there is no point in starting to put together your final accounts until it is correct.
Getting the right balance into the right accounts
It is a good idea to label each balance, to show where it will go in your final accounts. For example against ‘sales’ write ‘T’ ‘for trading acccount’. Write ‘P L’ beside ‘rent rates’ to show that it is going into the profit and loss account. Write ‘B’ beside each asset account, to show you will be taking it into your balance sheet.
Items on the debit side of the trial balance are expenses or assets; those on the credit side are revenues or liabilities. In the revenue accounts we are only interested in revenues and expenses. How do we recognise them?
A revenue is an income; an expense is an outgoing. Neither has to be in cash. If you have more stock left at the end than you had at the beginning of the accounting period, that is just as much a revenue as a sales figure. Another way of putting it is to say that excesses of expenses over revenues are called losses. Expenses represent an outflow of funds within the period. They include such things as electricity, motor expenses, rents paid or payable, and discounts allowed. Items classed as revenues represent incomes within the same period. They include things like commissions, rents receivable, and discounts received.