Revenue and other income represent the economic inflows of a business. Trading businesses earn sales revenue (reduced by sales returns); service businesses earn service fee revenue; both types of business may also earn other income from secondary activities such as rental or commission.
Under the revenue recognition theory, income is recognised when earned — when goods are sold or services provided — not when cash is received. This creates two year-end adjustments. Income received in advance arises when cash is received before the income is earned: the unearned portion is set aside as a current liability and reversed at the start of the next period. Income receivable arises when income is earned but not yet received or recorded: the amount is recorded as a current asset and reversed at the start of the next period. Both adjustments are required by the accrual basis of accounting.
In the Statement of Financial Performance, sales revenue and sales returns appear in the trading portion; service fee revenue appears as the primary revenue line for service businesses; other income is listed item by item — each type separately — after gross profit (or after service fee revenue for service businesses). In the Statement of Financial Position, income receivable is a current asset and income received in advance is a current liability.
When interpreting an income account: at the start of the year, a debit typically reverses the previous year's income receivable, while a credit typically reverses the previous year's income received in advance. Before closing, at year end, a debit typically sets aside the unearned portion of income received in advance, while a credit typically records the earned-but-unreceived portion as income receivable. The closing entry to Income summary reveals the income earned for the period.