But they all generally describe the same event, which the Accounting profession (FASB Codification Topic 605-10-20) defines as:

What does that mean? It's the "Get" in return for what your business normally gives, the cash inflows (or cash due to you in the very near future) from operating. More privy readers may get confused by the portion including, “settlements of liabilities.” But read the rest of the sentence. The most important part of this definition is where it's stated that the achieving of the settlement is done so by providing goods or services. So, you have to earn it from normal course of business for it to be revenue. Otherwise, it would be the lowering of an expense.

So let's break that definition down in to parts:

"...Inflows or other enhancements of assets..." - This means cash paid immediately, or billed to be paid in 30 days or so. "Other enhancements of assets" usually refers to Accounts Receivable (the money your customers owe you), and that's an asset on your books. But wait, that means we're saying we have money that we haven't received yet? Yes, but more on that later.

"...of an entity..." - THIS MEANS A BUSINESS!!! Even for a sole proprietor. Selling a mini-fridge on Facebook marketplace when your proprietorship business does plumbing is not revenue. Getting paid to fix pipes is revenue.

"...or settlements of its liabilities..." - What in God's green one does that mean?! Say you own a jewelry company, and you've racked up a bill with a tool company buying a bunch of repair kits. You know you're coming up on a slow season and don't want to release cash you might need later, so you see if you can provide jewelry for the tool company's raffle at its Christmas party in exchange for not having to pay your bills. Not an extreme scenario at all. Well, if the tool company says yes, then congratulations, you sold jewelry. Better put, you made revenue from a mix of bad timing and smooth-talking. What is the revenue amount? The amount of the bills you get to throw away.

"...during a period..." - This relates to a fundamental principle of accounting--the timing principle. The first lines of your Profit and Loss Statement (or P&L, Statement of operations, Income Statement, etc.) represent how much you sold in a specific period of time (usually month, quarter, or year).

The end of the definition was already discussed in an earlier paragraph, but revenue is supposed to represent your business's ability to do what it is meant to do. Inflows from other events outside what your business "does" is reported separately as a "gain." Say that mini-fridge from earlier is a company asset, not a casualty from a questionably increasing drinking habit, and you sold it on Facebook Marketplace for more that your balance sheet says its worth to you. That's not revenue. That's a gain.

Multiple ways to calculate?!

Remember earlier when I asked why revenue is recognized before the cash was received. I've seen that "I smell an Enron" face you're making right now before...many times. Well, for any company that meets any of the criteria below (and possibly some others), you're required to report to the IRS this way. We call it the accrual method. And there is logic to recording your revenue in advance of payment. First, because by providing the goods/services requested from your customer, you've fulfilled your obligation to get paid. That revenue is legally yours once you've done the work. Secondly, you're only saying you have/earned money that you reasonably expect to collect. If you give product to someone who is not expected to pay their bills, that's not revenue--it's either stupidity or charity.

Cash vs Accrual example

So the alternative to the accrual method is what we call Cash basis Accounting, and it's much less complicated than the accrual method. Basically, you claim revenue when you get paid, regardless of whether you've delivered on your end of the bargain or not, and when you pay out to suppliers, that's when you record an expense. Seems logical. Speaking of, why wouldn't Uncle Sam want you to use cash basis if you had inventory? Because you could just buy up a ton of inventory, take a major expense at year end, and not owe taxes. Especially when you could be looking at 60 days or better between the time you paid for the inventory and the point in time where you actually received the cash.

In the example below, I illustrate where the timing differences are between Accrual Accounting and Cash basis Accounting. In this example, let's say your company has one sale all year. Congratulations, your dad now giggles when he hears you utter the word, "success." The date the customer orders from you is irrelevant for your financial statements, despite the potential cash flow planning that's needed to deliver on the order. But the date you deliver on the order (or provide the service, build the love shack, whatever) is important. Under accrual accounting, whether your paid at that point or not, that is now revenue. In a case where your customer is paying on credit (10 -30 days at the most, hopefully), then you now have to wait until the check that was "in the mail" 3 weeks ago finally decides to stop by to claim that revenue under the cash basis.

This can have a significant tax advantage over the Accrual method, if all you report your financials to is the IRS. However, if you ever want investors, a bank loan, or anything else in the public sector, you'll likely be forced to prepare reports under the accrual method.

Conclusion

I hope you found this informative and helpful. If you have any questions or concerns about what you read in this post, please reach out at lamppostoa@gmail.com. For those out in the proof of concept phase for their first business venture, I hope this helps provide some assistance on how to setup and what to look for. And remember, you should always consult your CPA before making any changes to your bookkeeping or taking on an accounting concept that you're not familiar with. Thank you so much for those who made it this far, and I'll see you next time on LampPost.