Service Revenue: Definition And Types

Service Revenue: Definition And Types
Service Revenue: Definition And Types

Service revenue is a single line item on the income statement that accounts for revenue from any services a company provides. 

Understanding how to record them and how credits and debits work is essential to the overall accounting process.

What Is Service Revenue?

The term “service revenue” is used for revenue recognized in lieu of services that have already been provided to customers, regardless of cash received.  In other words, the income received from the provision of services is called service income.

Service Revenue means the gross amount of all monetary. It can be in-kind or other consideration that you may receive at any time in connection with the provision of the Licensed Service. This is whether as a usage, transaction, subscription or service fee or any comparative fees, based on or involving the use of the Licensed Service. 

For purposes of determining service revenue, the amount of compensation in kind or other non-monetary form that you may receive is considered to be equal to the standard price (as set forth in the price schedule published by you on the date the Licensed Service is provided) for the Licensed Service less all cash payments.

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How Does It Work? 

Service revenue tells a business owner how much revenue they receive from the sale of services during a set period.  However, it doesn’t tell them how much they’re getting. 

This requires additional calculations because determining profit and revenue requires understanding how much service revenue you reinvest in the business along with other business expenses.

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Types Of Service Revenue

There are two main types of income from services:

Operating Revenue

Operating revenue means the income of the enterprise, which is its main purpose.  It includes all income from services that are the main part of the business. 

In addition to calculating operating income, you can also specify it as transaction-based, time-based, project-based, or recurring. 

It helps businesses account for all types of operating income, regardless of the method by which they receive payment for their services.

Non-Operating Revenue

Non-operating income refers to any other services the company may offer.  If the business receives income from these alternative services, the accountant can record it as non-operating income. 

This can include income from dividends, investments, currency write-offs or any write-off of business assets.

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Service Revenue Example

Let’s say you run a hair salon.  You provide services such as haircuts, coloring and perms.  However, you also sell products such as shampoo, conditioner and hairspray. 

Considering your accounting period for Q1 2021 (January, February and March 2021), you earned $10,000 in services (service revenue) and $1,500 in product sales (product or sales revenue).  Your total income on your company’s income statement will be $11,500.

The amount of service revenue you receive appears at the top of your income statements.  It is shown as an operating income account.  Operating income is the income generated from the core activities of your business. 

For example, if you run a hair salon, hair salon services would be considered operating income.  If you do a side business (like investing in a hair care brand), your investment earns you a profit—this is considered non-operating income.

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Is Service Revenue An Asset?

Service revenue is not an asset in itself.  This can be confusing because service income technically contributes to your “asset account” on your ledger when using the double-entry method. 

However, for financial accounting purposes, service revenue is not considered an asset.  In accounting definitions, a current asset (such as a receivable) is any asset that will provide economic value within or within one year.

For accounting purposes, revenue is recorded in the income statement, not the balance sheet.  A balance sheet describes a company’s assets, liabilities, and equity or shareholders’ equity. 

The income statement provides an overview of all the expenses and income of your business for the accounting period.  On your income statement, you will ultimately record your company’s net income, which will include service income.

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Is Service Revenue A Debit Or Credit?

In general, income is defined as the profit of any business entity from ordinary business activities that may provide services or sell goods.

The normal balance of income from services is credit.  This means that when an entity receives revenue from a service, it is recorded on the credit side of the trial balance, journal, and ledger.  In addition, the nature of the income is also credit.

Revenue from services is recorded in accounting according to the double-entry system.  When a company receives revenue, it increases the organization’s equity and will be recorded as a credit in the income statement and journal entries.

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What Is Unearned Service Revenue?

Unearned service revenue is a liability to the payee, so the opening entry is a debit to the cash account and a credit to unearned revenue. 

When a company receives revenue, it decreases the balance in the Unearned Revenue account (debit) and increases the balance in the Revenue account (credit).  The unearned revenue account is usually classified as a current liability on the balance sheet.

If a company did not deal with unearned revenues in this way, but instead recognized them all at once, the revenues and profits would initially be overstated and then understated for the additional periods during which the revenues and profits were to be recognized. 

This is also a violation of the matching principle, as revenues are recognized immediately and related expenses are recognized only in subsequent periods.

How To Record Service Revenue

Service revenue is not recorded on the balance sheet, but is recorded on the balance sheet through other entries such as sales, accounts receivable, and cash.

This is usually done using a double entry system that uses a debit and a credit.  A double-entry system records a debit on one side of the balance sheet and a credit on the other side.  Both sides need to “balance” – hence the term “balances”.

If the services have been rendered and the revenue has not yet been collected, then the amount to be collected will fall under “receivables” on the company’s balance sheet.

Accounts receivable are money owed to a company by customers who have received a good or service, such as a handyman who provides a service to a customer and sends an invoice but has not received payment.

When an invoice is created, it should be accounted for by debiting the Accounts Receivable account and crediting the Sales Account.

Conclusion

A service may be intangible or tangible and may involve only one party, such as when a person pays someone to mow their lawn, while other types of services involve two parties, such as when a consumer hires an electrician to repair home wiring.

Service providers often combine different types of skills to satisfy customers, such as knowledge of how products work with experience in repairing them.  The type of service provider depends on what they offer, so you can hire an accountant if you need tax advice or take your car to a mechanic if something breaks down.

The main reason that service revenue is not a current asset is that it is not directly related to any company.  It has more potential than other asset types, but there are many variables that need to be in place to make this money-making opportunity profitable and worth investing in.

Service Revenue FAQs

Where Is Service Revenue Listed?

Accountants list service revenue at the top of the income statement.  It’s on a separate line that deals with revenue, under the sales revenue line.  Service revenue is always reported on the income statement, not on the balance sheet, regardless of whether the service is pending or paid for.  All services performed must be on the income from services line.

How To Find Out A Company’s Current Ratio?

To find a company’s current ratio, simply divide its current assets by its current liabilities using the following equation:  Current ratio = Current assets / Current liabilities

An important note is that only tangible assets can be considered current.  Intangible assets such as trademarks, copyrights, intellectual property, and goodwill cannot be easily converted into cash within a year, even though they still provide the company with economic value.

How To Determine Service Revenue?

To find a business’s service income, you need to check the income statement (not the balance sheet).  Service revenue can be found at the top of a company’s income statement.  It will likely be categorized as “Revenue” which will then be split into two categories: service vs. product or sales revenue.

References

  • indeed.com – FAQ: What Is Service Revenue? (With Definition and Types)
  • skynova.com –  Is Service Revenue an Asset?

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