Revenue Accounts

Revenue is the total amount received by a business or recognized as earned when the business sells 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 service provider 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 renting industry).

Revenue Accounts List

Following are the common revenue accounts:

Revenue/Sales/Fees: These accounts are used interchangeably to record the main revenue 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 other companies 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 sales account. Sales Discounts: This account records the discounts given to customer on the gross amount.

Understanding An Insurance Company's Revenue Model

ShareThis comments The revenue models of insurance companies are based on premiums collected from policyholders. Premiums are the starting point for revenues earned by all types of. This includes life insurance companies, auto insurance companies, companies that sell homeowners insurance and even companies that sell annuities. Ads by Google Royal Sundaram Car Insurance - Covers Plastic, Metal Parts.Hassle Free Claims.Buy Online royalsundaram. in/Car_Insurance ICICI Mediclaim One Health Policy For Entire Family No CheckUp or Paperwork. Buy Now! healthinsurance-icicilombard. com Pricing of Risk by an Insurance Company The revenue model starts with the pricing of risk and the sale of an insurance policy. The insurance policys benefit amount represents the amount that the insurance company is willing to pay should a loss occur. For life insurance, that loss is death. With property and casualty insurance such as auto and homeowners insurance, the loss is damage, theft or destruction of property, such as a home or auto. Risk Pooling and Premium Pricing The willingness to accept this risk comes at a price to the policy owner. This price is the premium amount and is based on the common occurrence of risk, as distributed among a large class of people. This process is known as risk pooling and is performed by actuaries hired by the insurance company. The risk pools determine the likelihood of a loss occurring for a class and the price for that risk, which becomes the premium amount. Net Premiums When the premium is paid, the insurance company nets out its expenses associated with keeping the coverage in force. This includes commissions paid to agents and brokers of the insurance company. It also includes the administrative and operational costs of the insurer such as overhead, salaries and other business related expenses. The net amount of the premium represents the revenue amount that the insurer has to invest.

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 insurance company 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 as variable 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 equity securities. 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 a component 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 Company Accounts? If there is any income by way of interest, dividend or rent of the insurance company, the net income (after deduction of tax) will be shown on the outer column of the credit side of the Revenue A/c. Any accrued and outstanding interest, dividend etc., is also taken into account.

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 his nominee on the policy. In the case of an endowment policy, the claim arises either 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 of the 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 or survivance. Claims include reversionary bonus and interim bonus. The claim in life insurance business may arise due to two factors - by death or on maturity of the policy. Claims are shown on the debit side of the Revenue Account. Claims paid, claims outstanding for the year and claims accepted and claims intimated but not yet accepted will be taken into account and from which any reinsurance recoveries 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 pay to insured till his death for a lump sum received in the beginning known as considerations for annuities granted. Annuity is considered as an expense and shown on the debit side of the Revenue Account. The person who receives the annuity is called annuitant. (b) Considerations for annuities granted. Any lump sum payment received in lieu of 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 profit policy. 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?

The expenses covered under this head will include administration, establishment charges, etc., will be shown on the debit side of the Revenue A/c separately or in the 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, should be entered on the credit side of the Revenue Account as the first item. Life fund at the end of an accounting year, which is nothing but the balancing figure of the Revenue Account, is entered on the debit side of the Revenue Account as the last item. It is then entered on the liabilities side of the balance sheet under the head 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 which he 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 some other person who has life interest therein, takes loan against the security of such assets or properties, such a loan is called loan on reversion.

9. How do you deal with dividend to shareholders in case of life insurance company?
a. If it is given trial balance, and if there is any balance of profits, it should be

deducted from the balance of profits of the liability side of the balance sheet under the head RESERVE OR CONTINGENCY ACCOUNTS.

b. If it is given in the trial balance, and if there is no balance of profits, then, it should be entered on the debit side of revenue account after the management expenses are entered. c. If it is given in the adjustment, and if there is balance of profits, then, first, it should 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 the head OUTSTANDING DIVIDENDS. d. If it is given in adjustments and there is no balance of profits, first, it should be entered on the debit side of the revenue after all management expenses are entered. Secondly, it should be entered on the liability side of the balance sheet under the head OUTSTANDING DIVIDENDS.

10. How are the following treated in the annual accounts of a general insurance company? Outstanding claims - if it is given in the trial balance and if they relate to the last year, they should be entered only in the revenue account and shown as a deduction from the claims paid during the year on the debit side. If it is given in the trial balance and relates to the current year, they should be entered on the liability side of the balance sheet under the head Estimated Liability in respect of outstanding claims`. If it is given as an adjustment, it must be added to the claims paid 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 sheet under the head Agents Balance` and amount due from the agents are account of revenue to the insurance company.

11. What do you mean by (a) Reversion: It means in reversions in order to enable the company to pay the bonus 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 head investment.

(b)

Reversionary Bonus: If the bonus declared is neither paid in cash nor is utilized in 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 is called reversionary bonus.

12. How do you treat the following in the books of a general insurance company? (a) Commission on re-insurance ceded: It is an income to the company, which has ceded or transferred the reinsurance business, so it should appear on the credit side of the concerned revenue account.

(b)

Commission on re-insurance accepted: It is an expense for the company, which has accepted the re-insurance business. So it should be entered on the debit side of the concerned revenue account.

(c)

Commission on direct business: It is an expense (commission paid to their agents), so it should be entered on the debit side of the concerned revenue account.

(d)

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

(e)

General Insurance: An insurance company carrying on insurance business other 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 of business fire, marine etc General Insurance policies are only for one year and therefore there is question of a future liability. Policies are issued throughout the year and remain in force till after the close of the financial year. A provision has

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