Companies use different metrics to measure the state of their business. Service revenue appears as one of the most important metrics, allowing companies to see how much revenue is generated each year.
This number gives an overall picture of a company’s financial health—making operational and investment decisions easier.
Throughout the article, we’ll cover the question, Is service revenue an asset? And we’ll clarify our answer with examples and a how-to guide for recording service revenue.
What is service revenue?
Service revenue is, in fact, an operating revenue account that records business income from goods and services provided to customers.
A revenue account encompasses all activities performed by the company which bring an economic benefit. Take note that interest income or income earned from shipments does not apply.
The service can be tangible or intangible and can involve one or more parties.
A good example is someone hiring a person to mow their lawn or a customer hiring an electrician to fix the wiring in their home. Once the customer pays, it converts to service revenue. A company can even provide different skills, such as information about certain products, how they work, and the ability to fix them.
The amount of service revenue is displayed at the top of the income statement. From there, it gets added to the revenue from product earnings as a way to show the company’s total revenue during a specific period.
Is service revenue an asset or a liability?
The simple answer is no; service revenue is not an asset. An asset is something like a resource owned by the company that adds value to the business. Assets get included on the balance sheet since they are resources used to generate service revenue.
On the other hand, service revenue is a business’s earnings from providing a service to its customers. Therefore, service revenue is categorized as an income or revenue rather than an asset and belongs on the income statement rather than the balance sheet.
The only time service revenue is categorized as a liability is when it is deemed to be unearned revenue—for example, if services were paid for upfront but weren’t performed yet.
What does service revenue include?
Service revenue includes any services performed by a company. Some companies even provide multiple services, which all count toward this revenue. Effectively, all services which raise a company’s income qualify as service revenue.
See also: What Is Annual Revenue?
What are real-life examples of service revenue?
Service revenue can fall into different categories but may include some of the following:
- Recurring operating revenue, such as an ongoing service in the form of a subscription service, monthly rent, or monthly retainer
- A specifically earned service revenue, such as a set number of consultation hours
- Transaction-based, which includes one-time payments such as a single consultation
- Project revenue is service revenue earned from a single project which could span weeks or months. For those spanning multiple accounting periods—in most cases, across multiple years—the accounting team might divide the payment into different quarters.
Step-by-step how to record service revenue
Step 1. Perform the service and bill the client.
The first step involves performing the service and billing the client. This crucial step will explain whether the transaction is classified as service revenue and the amount to get entered into the accounting ledger.
Essentially, this classification starts the process by which a company generates financial statements such as income statements, a balance sheet, or a statement of cash flows.
Step 2. Record the double entry of debit and credit.
The second step includes recording the double entry of debit and credit as revenue into the company’s general ledger using the double-entry system, which allows the financial statement to balance.
For those services which haven’t been paid yet, the entry is listed as accounts receivable rather than revenue to keep track of services.
Service revenue bookkeeping entries get entered into the ledger based on the method chosen, such as the accrual accounting method.
Step 3. Input info to financial statements.
The last step is to format all of this information into financial statements, including the income statement, balance sheet, and statement of cash flows.
Though service revenue is included on the income statement, this information trickles down to the rest of the statements companies need to make crucial decisions.
|Carr’s Tire Exchange, LLC: Income Statement for Year Ending Dec. 31, 2021|
|Service revenue (tire changes, etc.)||$300,000|
|Sales Revenue (Tires, brakes, etc.)||$50,000|
|Cost of Goods Sold||$10,000|
|Income Tax Expenses||$20,000|
See also: General Ledgers: The Easy Small Business Guide, which is a good place to start learning about general ledgers and recording transactions correctly.
Frequently asked questions
Service revenue is a revenue account once the service company receives all payments. If the payment for the service is still outstanding, the transaction becomes a liability until such a time as the invoice comes back with payment.
In truth, service revenue is neither an asset, liability or equity entirely. An asset is owned by the company, allowing it to make revenue, even service revenue. Service revenue refers more to income – reflected on the income statement – unless a payment is outstanding.
If a payment is outstanding, the transaction becomes a temporary liability until such a time as payment is received. Service revenue is never equity. The definition of equity is a stakeholders’ stake in the company, which is located on the balance sheet, not the income statement like the service revenue.
Is service revenue an asset is a question often asked by company owners. After all, apart from making a profit, a business owner must focus on ensuring they have the correct accounting methods. And up-to-date and accurate financial data allows for better decision-making.
The answer to the question states that service revenue is a revenue account disclosed on the income statement. Service revenue only belongs to a different account when it’s unpaid. Once the service is provided but the company is waiting on payment, the transaction is considered a liability.
Of course, the data trickles down to other financial statements, making accuracy a top priority. Follow the steps listed in the article to record service revenue transactions appropriately.
Agata Kaczmarek has held a passion for writing since early childhood. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Master’s Degree in Accounting and Finance.
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