Sales or turnover

Recognise the difference

Unit 15

A sale is a sale, it is obvious isn’t it?
But because it is such an important concept and is used in many circumstances specified by law, the Law provides a definition.

The sales for a business is referred to as Turnover rather than Sales.

So Turnover comprises the amounts a business derives from providing goods and services that fall within its ordinary activities, after deducting trade-discounts and VAT.

It should be clear what the ordinary trading activities of the business are; Consultancy Services, Vehicle repairs, Provision of Software etc. So revenues from activities that are not part of ordinary trading would not be Turnover. Interest Receivable, a gain from the sale of an asset would be income to the business but not normally Turnover.

Equally important is when revenues (Turnover and Other Incomes) should be recorded (also known as Recognised) in a businesses books of account.

The point of recognition is taken to be when the seller has the right to receive the value associated with the transaction having performed their side of the agreement. So for example the goods have been dispatched and received by the purchaser, the consultancy work has been competed and report delivered under the terms of an agreement etc.

A common area that has recognition issues is Amounts Received in Advance. The customer has made perhaps a deposit payment in advance of the goods being manufactured and delivered. This would not normally be Turnover as the revenue has not yet been earned. For some businesses this may be a complex area and professional advice may be very appropriate.

Additional complexities can be associated with retention of legal title and warranty clauses, again professional advice should be sought.

Turnover is usually the top line in a profit and loss statement for a reporting period with all expenses deducted from it to determine the extent of profit or loss for the business. For good or ill Turnover is used as an important factor in considering business performance so paying attention to how the business derives and recognises its Turnover is a prime focus for owners and management.

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