Future Business Leaders of America (FBLA) Accounting Practice Test

What is meant by "Revenue" in accounting terms?

1. A decrease in owner's equity

2. An increase in owner's equity

3. A withdrawal by the owner

4. A sale of assets

The correct answer is: An increase in owner's equity

In accounting, "Revenue" refers to the income generated from normal business operations, particularly from the sale of goods and services to customers. When a business earns revenue, it results in an increase in owner's equity. This increase occurs because revenue adds to the overall profitability of the business, which ultimately contributes to the equity that owners have in the company. Revenue is a fundamental concept in accounting, as it reflects the core activities of a business. When a company sells its products or services, it recognizes revenue, which is recorded on the income statement. This recorded revenue can lead to retained earnings, affecting the balance sheet by increasing shareholders' or owners' equity over time. Understanding revenue as an increase in owner's equity is essential for evaluating a business's financial performance and overall health. In contrast, options that suggest revenue represents a decrease in owner's equity or withdrawals made by the owner do not align with the standard accounting definition. Additionally, designating revenue as a sale of assets misrepresents the concept, as revenue pertains specifically to ongoing operations rather than the liquidation of assets.