The accounting for goods sold to customers is straightforward. When a company delivers goods, it records an expense while reducing inventory. Similarly, it accounts for the revenues generated from those goods. For services, however, the process may differ, which falls under services rendered. Before understanding its accounting, though, it is crucial to understand what it is.
What are Services Rendered?
Services rendered is a term used to describe the conclusion of a service contract between a renderer and the client. In some cases, the process of providing services may involve a continuous or long period. Similarly, service providers may also receive payments in advance for those services. Therefore, it is crucial to separate those collections from any work delivered to the client.
In essence, the term services rendered refers to the act of providing a service to a client. This definition also applies to accounting and how to record those services. Usually, when companies complete the provision of service, they send an invoice to the client. This invoice serves as a base in the accounting for those services rendered.
What is the accounting for Services Rendered?
Like the delivery of goods or products, services rendered has two accounting aspects. The first relates to the recognition of the expenses incurred for those services. Usually, companies account for these as they occur, which is in line with the accruals concept in accounting. The process involves identifying each expenditure and allocating it to the relevant account.
In the case of goods and products, those expenses become a part of the cost of goods sold. For services, however, they contribute to the cost of services. Overall, when companies incur expenses for services rendered, the journal entries will be as follows.
Dr Service expense (Cost of services rendered)
Cr Accounts payable or Cash/Bank
The other aspect involves recognizing revenues for those services rendered. Usually, companies obtain these amounts from the contract with the client. In some cases, companies may also use a fixed rate for every unit of services rendered. Once established, they will send an invoice to the client requesting a payment. Using this invoice, companies can record the services rendered revenues as below.
Dr Accounts receivable
Cr Service revenues
In some cases, the client may also have paid for the services in advance. Companies record those payments as prepayments or advances. Similarly, some clients may pay for those services at the same time as they get rendered. In either of these cases, the essential journal entries for services rendered will remain the same. However, the relevant accounts will differ.
Example
A company, Green Co., provides accounting services to a client. The contract between both parties dictates the client must pay an annual fee of $50,000 for those services. For Green Co., the services rendered expense is $30,000. At each year-end, the company sends an invoice to the client requesting the contractual payments.
For the services rendered expenses, Green Co. records the following journal entries.
Dr Service expense $30,000
Cr Accounts payable $30,000
Similarly, the company records the revenues for the services rendered as follows.
Dr Accounts receivable $50,000
Cr Service revenues $50,000
Conclusion
The term services rendered describes the conclusion of a service from a provider to a client. The accounting for services rendered involves two aspects. Firstly, it records the expenses related to those services. The second aspect includes accounting for the revenues from services rendered. Usually, these figures come from the contract between both parties.
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