The income a company earns from providing a service is referred to as service revenue. The amount is shown at the top of an income statement and is added to product earnings revenue to show a company’s total revenue for a given time period.
Service revenue bookkeeping entries reflect an increase in a company’s asset account in a double-entry accounting system.
Here’s What We’ll Cover:
What Is Service Revenue?
Service Revenue is the income received by a company in exchange for performing a requested activity. The charges for such revenue are recorded using the accrual accounting method.
Accrual accounting records the dollar amounts for a charge when the transaction occurs rather than when the cash is exchanged. This means that all fees for services rendered to date can be included in an income statement, even if all bills have not yet been sent to clients.
Service revenue is shown at the top of an income statement and is separated from product sales but added to the total revenue.
An income statement does not deal with cash flow; rather, it deals with revenues, gains, expenses, and losses in the business’s operating and non-operating activities over a period of time.
For a service-oriented business, the revenue section of an income statement might look like this:
John’s Plumbing
Revenues
Product Sales: $9,875
Service calls: $88,000
Total Revenue: $97,875
You’ll notice that John does very little in product sales because most of his business is in the actual service of fixing things for his customers. The bottom of his income statement will show you his company’s net income after expenses have been removed.
Income Statement: John’s Plumbing
Revenues
Product Sales: $9,875
Service calls: $88,000
Total Revenue: $97,875
Expenses
Wages (part-time help) $8,000
Vehicle Expenses $2,000
Property Tax (home office) $1,000
Insurance $2,000
Supplies $4500
Telephone $600
Advertising (Facebook) $600
Banking $500
Income Tax Expenses $8000
Total Expenses: $27,200
Net Income: $70,675
(Revenue – Expenses)
Income statements are very important to a company’s management, as it shows the direct relationship between revenue and expenses and if the company is profitable.
What Are the Types of Revenue?
There are two types of revenue, “Operating Revenue” and “Non-Operating Revenue”:
Operating Revenue
This is the income generated by a company’s primary source of revenue. John’s Plumbing revenue, for example, would be classified as “Operating Revenue” because everything he earns is related to his plumbing business.
Non-Operating Revenue
This is the portion of the income from a company’s other activities, such as investments.
Assume that John expands his local business into a plumbing empire with a network of well-equipped plumbing vans manned by experienced personnel operating in five states. He reinvests a portion of the company’s profits in other ventures. Profits from those investments would be classified as “Non-Operating” revenue.
Why Are Service Revenues a Credit?
Accountants typically use a double-entry accounting system for bookkeeping when recording transactions in a company’s general ledger.
A double-entry system necessitates an additional corresponding entry to a different account for each entry. Consider the word “double” in “double entry,” which stands for “debit” and “credit.” Each total’s two totals must be equal.
Consider that John performs a plumbing service for which he charges his client $600.00. John will record this credit under the heading “Service Revenues” in his bookkeeping. John must also balance this credit with a debit so that he will debit $600.00 from his “Accounts Receivable” (an asset account).
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