revenue accounts

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Revenue Accounts

Revenue is the total amount received by a business or recognized as earned when the businesssells something, usually services and goods. In modern accountancy, revenue is recorded when it

is earned not when the cash is received from customers. For example when a phone serviceprovider records revenue when calls are made not at the time when you pay the bills. This

principle is known as revenue recognition principle.

Types of Revenues

Revenues can be classified as operating revenue and non-operating revenue.

Operating revenues are those that originate from main business operations. For

example: Sales, etc.

Non-operating revenues are earned from some side activity. For example: Interest

Revenue, Rent Revenue (except in case where the business' main industry is rentingindustry).

Revenue Accounts List

Following are the common revenue accounts:

Revenue/Sales/Fees: These accounts are used interchangeably to record the mainrevenue amounts. However most companies/businesses give their revenue account a

more specific name like: fees earned, service revenue, etc.

Interest Revenue: is used to record the interest earned by the business. Rent Revenue: is the revenue from buildings or equipment of the business on rent.

Dividend Revenue: is used to record the dividend earned on the stock of othercompanies which is owned by the business.

Following accounts are called contra revenue accounts because they have exactly opposite

characteristics of revenue accounts. Important contra revenue accounts are:

Sales Returns: Sometimes goods are retuned by the customers for some defect or due to

some other reason. These are recorded in sales returns account which is a contra salesaccount.

Sales Discounts: This account records the discounts given to customer on the grossamount.


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General Account versus Separate Account Assets

For life insurance companies, 2 accounts are maintained in order to address the risks associated

with their products. These accounts are the general account and separate account of the insurance

company. In the general account, net premiums from fixed products issued by the life insurancecompany such as fixed annuities, term life, whole life and universal life products are deposited.

These net premiums are invested in fixed income securities such as municipal and treasury bonds

in order to back the insurers promise to pay.

Separate Account

The separate account is backed with net premiums from variable insurance products such asvariable annuities and variable life insurance. These products premiums must be segregated or

maintained in a separate account by law since it is the policy owner that determines how the

premiums are invested, not the insurer. This investment control means that the policy owner is

subject to a greater risk because those premiums are in the stock market and other equitysecurities.

Interest Earnings and Revenue

The interest earned by the investment of assets in either the general account for life insurance

and property and casualty insurance companies or separate account for the life insurer is acomponent of overall revenue for the insurer. Savings realized by lowered expenses and less than

expected risk losses (i.e. deaths, illness, disability, auto accidents) leads to higher revenues for an

insurance company.Related Articles

INSURANCE COMPANY ACCOUNTS

1. How do you treat interest, dividends and rent in Insurance CompanyAccounts?

If there is any income by way of interest, dividend or rent of the insurancecompany, the net income (after deduction of tax) will be shown on the outercolumn of the credit side of the Revenue A/c. Any accrued and outstandinginterest, dividend etc., is also taken into account.


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2. What do you mean by Claims and how do you treat it?

Claim is the amount payable by the insurance company to the insured, or to hisnominee on the policy. In the case of an endowment policy, the claim ariseseither on the death or on the policy holder reaching a stipulated age whichever is

earlier. In case of whole life policy, the amount is payable only on the death ofthe policyholder. Claim on the death of a policyholder is called claim by death.Claim on the policy holder reaching a stipulated age is called claim by maturity orsurvivance. Claims include reversionary bonus and interim bonus. The claim inlife insurance business may arise due to two factors - by death or on maturity ofthe policy. Claims are shown on the debit side of the Revenue Account. Claimspaid, claims outstanding for the year and claims accepted and claims intimatedbut not yet accepted will be taken into account and from which any reinsurancerecoveries will be deducted.

3. What do you mean by Annuity and how do you treat it?

(a) Annuity is an annual payment which a life insurance company agrees to payto insured till his death for a lump sum received in the beginning known asconsiderations for annuities granted. Annuity is considered as an expense andshown on the debit side of the Revenue Account. The person who receives theannuity is called annuitant.

(b) Considerations for annuities granted. Any lump sum payment received in lieuof granting annuity is called consideration for annuities granted.

4. What do you mean by Bonus in cash and how do you treat it?

The insurance company may pay the bonus in cash for the holder of a with profitpolicy. The bonus paid in cash will be shown on the debit side of the Revenue Account.

5. What do you mean by expenses of management and how do you treat it?


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The expenses covered under this head will include administration, establishmentcharges, etc., will be shown on the debit side of the Revenue A/c separately or inthe form of an attached schedule or working note.

6. How should life fund be treated in final accounts of life insurance company?

Life fund at the beginning of an accounting year, given in the trial balance, shouldbe entered on the credit side of the Revenue Account as the first item. Life fundat the end of an accounting year, which is nothing but the balancing figure of theRevenue Account, is entered on the debit side of the Revenue Account as thelast item. It is then entered on the liabilities side of the balance sheet under thehead BALANCE OF FUNDS AND ACCOUNTS.

7. What do you mean by loan on life interest?

If a person takes a loan on the security of a certain properties or assets in whichhe has only a life interest such a loan is called loan on life interest.

8. What do you mean by loan on reversions?

If a person to whom certain properties or assets revert upon the death of someother person who has life interest therein, takes loan against the security of suchassets or properties, such a loan is called loan on reversion.

9. How do you deal with dividend to shareholders in case of life insurancecompany?

a. If it is given trial balance, and if there is any balance of profits, it should bededucted from the balance of profits of the liability side of the balance sheetunder the head RESERVE OR CONTINGENCY ACCOUNTS.


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b. If it is given in the trial balance, and if there is no balance of profits, then, itshould be entered on the debit side of revenue account after the managementexpenses are entered.

c. If it is given in the adjustment, and if there is balance of profits, then, first, itshould be deducted from the balance of profits on the liability side of the balance

sheet under the head RESERVE OR CONTINGENCY ACCOUNT. Secondly,as it is not paid, it should be entered on liability side of balance sheet under thehead OUTSTANDING DIVIDENDS.

d. If it is given in adjustments and there is no balance of profits, first, it should beentered on the debit side of the revenue after all management expenses areentered. Secondly, it should be entered on the liability side of the balance sheetunder the head OUTSTANDING DIVIDENDS.

10. How are the following treated in the annual accounts of a general insurancecompany?

Outstanding claims - if it is given in the trial balance and if they relate to the lastyear, they should be entered only in the revenue account and shown as adeduction from the claims paid during the year on the debit side. If it is given inthe trial balance and relates to the current year, they should be entered on theliability side of the balance sheet under the head Estimated Liability in respect ofoutstanding claims`. If it is given as an adjustment, it must be added to the claimspaid during the year on the debit side of the revenue account and in the balance

sheet, it should be entered in the liability side.

Agents balance - It is always taken on the assets side of the balance sheetunder the head Agents Balance` and amount due from the agents are account ofrevenue to the insurance company.

11. What do you mean by

(a) Reversion: It means in reversions in order to enable the company to pay thebonus to its policyholders along with the policy amount on maturity of the policy.They are entered on the asset side of the balance sheet under the headinvestment.


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(b) Reversionary Bonus: If the bonus declared is neither paid in cash nor is utilizedin the reduction of premiums due from them on the date of declaration of bonus,but is paid along with the policy amount on the maturity of the policy then it iscalled reversionary bonus.

12. How do you treat the following in the books of a general insurancecompany?

(a) Commission on re-insurance ceded: It is an income to the company, which hasceded or transferred the reinsurance business, so it should appear on the creditside of the concerned revenue account.

(b) Commission on re-insurance accepted: It is an expense for the company, whichhas accepted the re-insurance business. So it should be entered on the debitside of the concerned revenue account.

(c) Commission on direct business: It is an expense (commission paid to theiragents), so it should be entered on the debit side of the concerned revenueaccount.

(d) Re-insurance: Re-insurance is a device of reducing the risk carried by anInsurance Company. An insurance company does not like to carry at single riskof a huge amount, When it issues a singly policy of a large amount it get a part ofthe risk insured with another insurance company. This is called re-insurance.The company which re-insures a risk is called Re-insuring or Accepting Companyand the company which cedes re-insurance is called Ceding Company.

(e) General Insurance: An insurance company carrying on insurance businessother than life insurance is said to be carrying on General insurance business.Under law a separate type revenue account has to be prepared for each type ofbusiness fire, marine etc General Insurance policies are only for one year andtherefore there is question of a future liability. Policies are issued throughout theyear and remain in force till after the close of the financial year. A provision has


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to be maintained to meet the claims arising under such policies (100% of netpremium - marine and 50% of net premium for others.)

revenue accounts

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