What is the definition of “revenue” according to GAAP?

Our company recieves a production payment check from its interest in an oil well each month. We then send a check for the operating expenses, and book the net as “revenue”. Our other company overhead etc. is then subtracted before getting to our bottom line – income or loss.

It has been alleged that we should call the initial production payment “revenue”. However, much like a “cost of goods sold”, if I fail to pay the monthly costs, the stream of income will stop. Therefore, it is not “revenue” until the costs are recognized and subtracted. Am I right according to GAAP?

Asked by: Bruce Decker 579 days ago - 2 Answers - 2521 views

2 Answers

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My logic is that the payment is revenue regardless of the circumstances surrounding it. The overhead qualifies as cost of good sold. By lumping the two together to find the bottom line for the oil interest before you take it to your company income statement is misleading – you’re not telling your shareholders how much it costs to operate the oil well. They should be recorded separately.

I hope that makes sense. I’m speaking from a non professional standpoint, just from what I’ve learned from accounting courses during school.

Answer by Rick 579 days ago
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  They are recorded separately Rick, and available for anyone to see on the income statement. The question is what to call them when you record them.
  
  In manufacturing, a typical representation is this:
  
  Sales price
  Less Cost of Goods sold (direct manufacturing cost)
  =Revenue
  Less overhead
  =Net income or loss
  
  I’m asking if this principle is applied in the oil and gas industry. Thanks for your observation. Good luck in school.
  
  Bruce
  
  Answer by Bruce Decker 579 days ago

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