Revenue is payment or the promise of future payment for the rendering of goods or services.
If the company uses cash-basis accounting, the company will recognize revenue when payment is received from customers. If the company uses accrual-basis accounting, the company will recognize revenue when the revenue is earned, regardless of when payment is received.
For example, suppose on May 10th Joe’s Plumbing Supply sells PVC piping to a plumbing contractor. The transaction amount is $2500. Joe’s gives the contractor payment terms of 30 days from the date of invoice (which is the transaction date). If Joe’s uses accrual accounting, Joe’s records the transaction on May 10th by debiting accounts receivable and crediting merchandise sales. In June, Joe’s receives payment from the contractor. Joe’s records the payment by debiting cash and crediting accounts receivable.
If Joe’s uses cash basis accounting, Joe’s will keep a record of the receivable created in May but will not record the transaction for accounting purposes. When Joe’s receives payment in June, Joe’s will record the customer payment by debiting cash and crediting merchandise sales.
The impact to the financial statements for the above transaction is as follows. If Joe’s uses accrual accounting, Joe’s income statement for May will reflect the $2500 sale to the plumbing contractor and the balance sheet will show the corresponding accounts receivable. If Joe’s uses cash basis accounting, only the June income statement will reflect the sale as Joe’s receives payment from the contractor.
