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How does revenue affect the balance sheet?

Author:
Harold Averkamp, CPA, MBA

Effect of Revenue on the Balance Sheet

Generally, when a corporation earns revenue there is an increase in current assets (cash or accounts receivable) and an increase in the retained earnings component of stockholders’ equity .

When a company earns revenue that had been prepaid by a customer, the company’s balance sheet’s liability deferred revenue will decrease and retained earnings will increase.

Examples of the Effect of Revenue on the Balance Sheet

Examples of revenue include the sales of merchandise, service fee revenue, subscription revenue, advertising revenue, interest revenue, etc. The revenue accounts are temporary accounts that facilitate the preparation of the income statement. However, when a corporation earns revenue, it has the effect of increasing Retained Earnings. We can see this with the end-of-the-year closing entries which will move all the income statement account balances to Retained Earnings.

Let’s assume that today a corporation sold goods on credit. The corporation’s current asset Accounts Receivable will increase and the company will credit the income statement account Sales. However, the Sales account is a temporary account that has the effect of increasing the corporation’s retained earnings.

Let’s assume that on December 31 a corporation received $10,000 for services to be done in January. Therefore, the corporation’s cash that is reported on the December 31 balance sheet includes the $10,000 and the balance sheet will also report a current liability deferred revenues of $10,000. In January, when the services have been provided, the corporation will record Service Fee Revenue of $10,000 (which has the effect of increasing the corporation’s retained earnings) and will eliminate the current liability of $10,000 that appeared on the December 31 balance sheet.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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