Are you a business owner interested to learn about earned revenue? Well, you’ve just landed at the right place.
From understanding what it is to learn when and how it’s recognized to exploring real-life examples, this guide will equip you with the understanding you need to make informed financial decisions.
For a better understanding and smooth accounting and workflow execution, consider consulting professional accounting and bookkeeping services.
What is revenue?
First things first, let’s define revenue.
Revenue entails the income a business generates from its operations, such as sales of products or services. It is the money that flows into a business from its customers or clients.
What is earned revenue in accounting?
Now that we know what revenue is let’s talk about earned revenue in accounting.
Earned revenue refers to the portion of a business’s revenue that is considered earned based on completing a specific task or milestone.
In other words, earned revenue is the revenue that a business has actually earned through its operations rather than revenue that is simply anticipated or expected.
With the help of experts from reputed accounting services for small business, you can easily differentiate between total and earned revenue in your daily, monthly, and yearly transactions.
When can you recognize revenue as earned?
Revenue can only be recognized as earned when certain criteria are met. These criteria include:
- The completion of a certain task or milestone
- The entire delivery of products or services to the customer
- The customer’s acceptance of the goods or services
- The cost of the products is fixed and determinable
- Collectability of payment is reasonably assured
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Real examples of earned revenue.
To illustrate how earned revenue works in real life, let’s consider a few examples.
Example 1
- A software company sells a subscription to its cloud-based software platform.
- The subscription is for a particular year, and the customer pays upfront.
- The company cannot recognize the entire amount of revenue as earned immediately upon receipt of payment.
- Instead, it must recognize revenue over the year as the customer uses the software.
Example 2
- A construction company agrees to build a new office building for a client.
- The contract stipulates that the company will receive payment upon project completion. The company or their hired accounting services provider cannot recognize revenue earned until the building is finished and the client has accepted it.
How to calculate earned revenue?
- To calculate earned revenue, you simply take the total revenue generated by a business and subtract any revenue that is not yet considered earned.
- For example, if your business generates revenue of $100,000, but $20,000 is from subscriptions that will be recognized over the next year, the earned revenue would be $80,000.
What’s the difference between earned and contributed revenue?
- Contributed revenue refers to revenue received as a donation or gift rather than as payment for goods or services.
For example, if a nonprofit organization receives a donation from a supporter, your accounting services provider will consider the donation contributed revenue.
- Earned revenue, on the other hand, is revenue that is earned through the sale of goods or services.
What’s the difference between billed and contributed revenue?
- Billed revenue refers to revenue that has been invoiced to customers but not necessarily collected.
- Conversely, earned revenue refers to revenue earned through completing a specific task or milestone.
For example, if a business completes a project for a client and invoices them for $10,000, but the client has not yet paid the invoice, that $10,000 would be considered billed revenue. However, the business cannot recognize that revenue as earned until the client has actually paid the invoice.
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In some cases, businesses may use accrual accounting, which means revenue is recognized when it is earned, regardless of when payment is actually received.
In this case, the $10,000 would be recognized as earned revenue, even if the client has not yet paid the invoice.
Wrapping up
By understanding what earned revenue is and how it’s recognized, you can make smarter financial decisions and grow your business.
Collaborate with accounting and bookkeeping services to simplify your accounting process.
