ABSTRACT
MEASURING SALES REVENUE (TURNOVER) The sales (turnover) figure is crucial in measuring profit for a period. Until the moment accounts ‘recognize’ sales revenue, they treat any costs incurred in providing goods for sale as ‘stock’, and carry them forward as an asset in the balance sheet. Only when accounts recognize sales revenue does ‘cost of goods sold’ become an expense. Until that point there can be no profit. (Following the convention of prudence, however, accounts may recognize losses sooner.)
The diagram below represents events in a manufacturing business. The business purchases raw materials, and then uses labour and capital equipment to convert them into finished goods (point A). When the business sells the finished goods on credit, legal title passes to the purchaser (point B), who becomes a debtor. Finally the customer pays cash (point C) to settle the account.
