Accounting Fundamentals Certification (AFC) Practice Test

Under what classification would 'Sales' be categorized in accounting?

1. Asset

2. Liability

3. Revenue

4. Expense

The correct answer is: Revenue

The classification of 'Sales' in accounting as revenue is based on the fundamental principles of financial reporting. Revenue represents the income generated from normal business operations, particularly from the sale of goods or services. When a company makes a sale, it increases its overall revenue, which contributes to the profitability of the business. Revenue is recorded on the income statement and indicates the company's ability to earn money through its core activities. This classification is essential for evaluating a company's performance over time and understanding its financial health. Revenue also impacts net income, which is crucial for stakeholder decision-making regarding investments and other financial activities. Understanding this classification is key for anyone studying accounting fundamentals, as it lays the groundwork for comprehending how various financial transactions affect a company's financial statements.