Revenue refers to the income a company generates from its operations. Some companies also term it as sales. Typically, it is the first item that appears on the income statement. Revenue plays a crucial role in companies and how they operate. However, the source of these proceeds may differ from one company to another based on their activities.
For service-based companies, these revenues come from services rendered during operations. However, they may still differ from one company to another. These revenues fall under service revenue in the income statement.
What is Service Revenue?
Service revenue is the money a company earns from providing services to its clients or customers. It’s the income that a business generates by offering services that satisfy its client’s needs, such as consulting, software development, legal services, and more. Usually, these revenues are the primary income source for most service-based companies.
Service revenue is an accounting term and differs from other types of revenue. It is most relevant to companies that provide services as a part of their operations. Sometimes, companies may also sell physical products as part of their activities with services attached to these revenues. These companies then separate the income from both sources under different headings. Service-related earnings then become a part of service revenue.
What is the accounting for Service Revenue?
The accounting for service revenue involves recording the income from providing services to clients or customers. The company must debit the cash, bank, or accounts receivable account and credit the service revenue account. However, the value of the entry will differ based on the accounting standards a company follows.
Accounting principles require companies to record only the portion of the revenue earned as income. With services, this requirement applies more than to companies that sell products. Essentially, the services a company renders may spread over several accounting periods. Companies must separate the revenue relevant to one period from others.
The accounting treatment for service revenue also involves reporting it as a separate item on the income statement. This requirement is more relevant to companies that provide both services and products. Although not directly, service revenue also impacts the balance sheet.
What is the journal entry for Service Revenue?
The journal entry for service revenue is straightforward, as mentioned in the accounting treatment above. It involves debiting the relevant compensation account while crediting the service revenue account. Overall, the journal entry is as follows.
| Dr | Accounts receivable or cash or bank |
| Cr | Service revenue |
However, companies must ensure not to include unearned revenues in this journal entry as they constitute a liability.
Example
A service-based company, Blue Co., provides training services to employees. The company signed a contract with a client recently worth $100,000. During the fiscal period, Blue Co. had only completed 60% of the services agreed upon in the contract. For that period, Blue Co. recognized service revenue of $60,000 ($100,000 x 60%) using the following journal entry.
| Dr | Accounts receivable | $60,000 |
| Cr | Service revenue | $60,000 |
Conclusion
Service revenue includes income from services rendered to clients for various services. It is a separate account that records only service-related earnings. Usually, it is the first item in the income statement as well. Service revenue constitutes only income earned during a period. Companies must not record unearned revenues as a part of this account.
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