What is income? Income or revenue is the gross economic benefits earned by an entity from its main business activities. Following two points are worth noting to understand the definition of income or revenue:
- Income and profits are separate things. Income (also known as revenue) represents the gross economic benefits earned.
- Income or revenue represents the gross economic benefits earned by an entity from its main business activities.
For instance, a grocery store earns revenue from the sale of grocery items. The store had a vehicle for business use, which was sold and replaced with a new one. The store earned economic benefits by selling the vehicle. Is it also revenue? NO! it is not revenue as these economic benefits are not earned from the main business activity i.e., selling grocery items. Economic benefits earned by any means other than the main business activities of an entity are classified as other income. (In this example, accounting of sale of vehicle is done as explained in the post “Gain on disposal of PPE).
How is income or revenue generated? In most of the cases, an entity either provides any goods (e.g., sale of cars, computers, crockery etc.) or services (e.g., banking, medical, consultancy, hair dressing etc.) to its customers. In exchange, the entity receives a consideration for the goods or services transferred. The core principle of accounting of income as required by “IFRS 15 – Revenue from contracts with customers” is that an entity should record income:
- in the manner that depicts the transfer of goods or services to customers
- at an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services
For accounting of income transactions, a control-bases five step model is followed. Following steps are followed to do the accounting of income.
STEP – 1: Identify the contract with customer
STEP – 2: Identify performance obligations
STEP – 3: Determine the transaction price
STEP – 4: Allocate the transaction price to performance obligations
STEP – 5: Recognize revenue as and when the entity satisfies a performance obligation
These steps are explained in detail in our section IFRS 15 – Revenue from contracts with customers.