Revenue, Inventory & Cost of Sales : Accounting

Cash Accounting

Cash accounting is an accounting method where income and expenses are recorded only when money is actually received or paid

• Income: Recorded when payment is received.

• Expenses: Recorded when payment is made.

• Unpaid invoices: Not recorded as income or expenses until paid.

• Advantage: Simple to understand and manage.

• Disadvantage: May not show the full financial position of a business.

• Example: A business completes £500 of work in October but receives payment in November. The income is recorded in November.

Accruals accounting

Accruals accounting is an accounting method where income and expenses are recorded when they are earned or incurred, regardless of when cash is received or paid.

• Income: Recorded when goods or services are provided.

• Expenses: Recorded when they are incurred.

• Unpaid invoices: Still recorded in the relevant accounting period.

• Advantage: Gives a more accurate picture of a business's financial performance.

• Disadvantage: More complex than cash accounting.

• Example: A business completes £500 of work in October but receives payment in November. The income is recorded in October.

Transaction Price

Transaction price is the amount of consideration a business expects to receive in exchange for transferring goods or services to a customer, under IFRS 15.

• Purpose: Determines how much revenue a business recognises.

• Fixed price: An agreed amount paid by the customer.

• Variable consideration: The amount may change due to discounts, refunds, bonuses or penalties.

• Example: A business sells goods for £1,000, so the transaction price is £1,000, assuming no discounts or other adjustments.

Relative stand-alone selling price

Relative stand-alone selling price is the proportion of the total stand-alone selling prices of different goods or services used to allocate the transaction price between them under IFRS 15.

- Example: A bundle contains a laptop (£800) and software (£200).

• Total stand-alone prices = £1,000.

• Laptop proportion = 80%.

• Software proportion = 20%.

• If the bundle costs £900, allocate £720 to the laptop and £180 to the software.

Cost of Sales

Cost of sales is the direct cost of producing or purchasing the goods or services a business sells during an accounting period.

• Definition: Direct costs associated with goods or services sold.

• Includes: Cost of inventory, raw materials and direct production labour.

• Excludes: Indirect expenses such as advertising, office rent and administration.

• Purpose: Used to calculate gross profit.