Is Service Revenue an Asset? The Complete 2022 Guide

Is service revenue an asset or a liability? We help you make better business decisions by understanding the role service revenue plays. Read on for the 2 types of service revenue, examples, and answers to your FAQs!

examples of service revenue

Service revenue is a crucial metric for any business to keep track of. But is service revenue an asset or a liability? Is it a credit or a debit?

Understanding how much service revenue your company generates per year and what percentage of overall sales it represents gives you a better overview of your company’s financial health.

This article will walk you through the definition of service revenue and answer some of our readers’ frequently asked questions. 

What is service revenue?

Service revenue refers to the income that a business generates by providing a service. It includes all services the business provides, whether or not the customer makes a payment. It’s important to note that service revenue doesn’t include income from product shipments nor interest.

Service revenue may come from a set number of hours of consultation or a combination of several hours over a month. Service providers often offer different types of skills in order to provide the highest customer satisfaction, such as product knowledge and repair skills. For example, an accountant can advise you on tax filing and bank reconciliation, and a personal trainer can create a workout schedule and a meal plan for you. 

Two types of service revenue

1. Operating revenue

Operating revenue is a business’s revenue from its primary business activities. It consists of every service-related revenue that the business receives as its main source of income (e.g., a retailer produces its operating revenue through merchandise sales).

Businesses can specify operating revenue as recurring, transaction-based, or project-based to record all types of operating revenue, regardless of how customers pay for their services.

2. Non-operating revenue

Non-operating revenue comes from any alternative services the business may offer. This type of revenue is also referred to as incidental or peripheral income. It may include revenue from dividend income, profits or losses from investments and foreign exchange, or any business asset write-downs.

Examples of service revenue

Some common examples of service revenue are the following:

a. Recurring revenue

Recurring revenue means an ongoing service that generates a recurring payment. Some examples are subscription fees, monthly rent, licensing fees, or a monthly retainer. Businesses can utilize recurring revenue to forecast future sales based on the value of continuous payments. 

b. Transaction-based service

Transaction-based service revenue refers to one-time payments. In other words, transaction-based revenue isn’t recurring revenue. The most typical example is a single consultation appointment or a one-time service that the business provides a customer.

c. Project revenue

Project revenue is the income that a business earns from a single project. This type of service revenue is often an estimation from before the start of the project, and it may span weeks or months. Accountants may split payments into separate quarters to account for the services they provide throughout that period if a project lasts several accounting periods.

Frequently asked questions about service revenue

Is service revenue an asset or liability?

In the standard accounting system, service revenue isn’t an asset. An asset is the resource businesses use to generate service revenue and other types of profit and is included in the business’s balance sheet. 

Service revenue, on the other hand, comes from a business’s primary service and is used to invest in other assets, pay off liabilities, and pay dividends to shareholders. 

Service revenue isn’t a direct result of any particular business. It is a revenue account, part of the income statement.

Although service revenue isn’t an asset, accounts receivable or cash payments from services are assets on a balance sheet.

Why is service revenue a credit?

In a traditional accounting system, a double-entry system includes debits and credits. According to this system, accountants calculate all revenue and place debits on one side of the balance sheet and credits on the other.
 
In this case, cash is debited while service revenue is credited. Because service revenue raises the company’s equity, it must perform as a credit to bring the accounts into balance at the conclusion of the accounting period. 

Why is service revenue important?

Though service revenue doesn’t represent income or profit, it’s still a vital metric for businesses to consider. Service revenue usually indicates: 

A business’s performance: You can use service revenue as a key performance indicator to analyze a business’s performance or revenue within a specified time period.

A business’s revenue streams: By categorizing service revenue, you can determine how much income comes from each source.

Forecasting models: By listing service revenue separately, you can predict both recurring and project-based revenue.

How to record service revenue

Most businesses use the accrual accounting method to track service revenue. This means the company records the revenue when the transaction occurs rather than when the consumer makes a payment. Additionally, service revenue may be included in income statements even before the customer pays the total amount.

To record service revenue, simply follow these steps: 

Step 1: Determine service revenue

The first step is to add up the income you have generated in providing a service. Having a list of your services along with a corresponding price list in advance can help simplify this step. Then, sum up all the money you’ve earned from your services accordingly. That’s your earned service revenue. 

Note that if you have unearned service revenue, you’ll need to record it as a liability on the business’s balance sheet. After the service is completed, unearned revenue becomes revenue on the income statement.

Step 2: Record your service revenue

The service revenue is reported under the “Revenue” section of the income statement. This section is placed at the top of the income statement, above the “Expenses” category. 

The revenue section is usually divided into two categories: service revenue and sales/product revenue. Make sure to input your service revenue in the proper category. The different types of revenue are then added together to get the total revenue. 

It’s also important to note that to record an unearned revenue, you must file it under the accounts receivable category. When the payment is finished, you can balance both sides by issuing the accounts receivable a credit and the accounts payable a debit.

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The bottom line

Understanding service revenue and how to record it is crucial to the overall accounting process. It helps you organize your finances, stay on top of your revenue, and make accurate decisions about operations and investments.

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