Service revenue asset or liability? Businesses generate income from the services they complete to an individual or another entity. Accounting comprises all revenue and profits generated by a business. Service revenue is a vital metric for any business as there is a need for a company to know how much it generates per year for providing services and the percentage of overall sales it represents. Having an understanding of this figure will help a company to understand its financial health, which in turn, will give room for informed decisions with respect to operations and investments.
Service revenue is one line item on the income statement accounting for revenue that comes from any services that a business provides. Having an understanding of how to record them as well as how credits and debits work is an important aspect of the overall accounting process. In this article, we discuss what is service revenue, Whether or not service is an asset or a liability, and its journal entries.
What is service revenue?
Service revenue refers to the income generated by a business in return for the completion of a service. It includes any service provided by a business, whether or not the customer submits payment. It does not include a shipment of goods or interest. The focus is primarily on the services of the business.
Service revenue gives a business owner an overview of how much income they generate from the sale of services within a set period. However, it does not reveal the amount of income they make as this requires more calculations because determining profit and income requires one to understand how much service revenue is being reinvested in the business alongside other business costs.
Service revenue falls under two main categories namely operating revenue and non-operating revenue. The operating revenue implies the income of the business which is its primary purpose. Here, it comprises all revenue from services that are a primary part of the business. In addition to calculating operating revenue, it can also be listed as transaction-based, time-based, per project, or recurring. This is helpful to businesses in accounting for all types of operating revenue regardless of the method of receiving payments for their services.
On the other hand, non-operating revenue refers to any other services that may be offered by the business. If a business receives revenue from any of these alternative services, it can be recorded as non-operating revenue. Dividend income, investments, foreign exchange write-offs as well as any write-downs from business assets may be included under this category of service revenue.
Although service revenue does not translate to income or profit, it is important to calculate it for a number of reasons. One of the reasons is that it is a key performance indicator. In essence, a company can use it to analyze its performance or revenue within a specified period of time.
Another area of importance is the fact that it helps in distinguishing between revenue streams, that is, one will be able to determine the amount of income that comes from each source by categorizing service revenue. Also, service revenue accommodates different forecasting models which can help with the prediction of revenue and profit. In other words, listing service revenue separately can help a business predict both recurring and project-based revenue.
To find the service revenue of a business, one has to check the income statement. Note that service revenue is not an item found on the balance sheet, rather, it can be found at the top of the business’s income statement which is likely to be categorized under “Revenue”.
Related: Service Revenue: Debit or Credit?
What is an asset?
An asset is any resource that possesses some economic value to a company and can be used either in a current or future period to generate revenues. In other words, assets yield economic benefits to a company. These assets can be controlled by a business or an individual and made use of it to generate revenue.
These resources are recorded on the balance sheet and can come in many forms. Once they are spent, they will be transferred from the balance sheet to the income statement and labeled as expenditures.
Although assets must not be owned, a business must have control of it. Many businesses have loans, notes, and leases on equipment that can eliminate their true ownership of the resources either directly or indirectly, however, they still have control of it.
Assets are presented on the balance sheet and are typically divided into different categories based on the period in which they will be used. That is, they are broadly classified under fixed and current assets. Fixed assets are so-called because they are expected to be used in future periods (a period of more than one year), while current assets are so-called because they are resources that are expected to be used up or consumed within a current period (a period of one year). There is another class of assets called intangible assets which comprise patents, trademarks, intellectual property, etc. Resources that provide future economic benefits but /do not fit into any of these categories can simply be called “other assets”.
What is a liability?
A liability is any financial obligation that a company has to meet which usually involves a sum of money. In other words, they are claims on a business’s assets by creditors, which reduces economic benefits to the company. Companies settle liabilities over time through the transfer of economic benefits which includes money, goods, or services. In short, liabilities are those things that are owed or borrowed.
Liabilities are recorded on the right side of the balance sheet which comprises long-term liabilities such as loans, bonds, debentures, etc, and current liabilities such as tax liabilities, unearned revenues, accrued expenses, etc. A third category is contingent liability which includes warranties and legal liabilities.
Related: Liabilities vs Assets Differences
Service revenue asset or liability?
Service revenue is neither an asset nor a liability. It is quite confusing because service revenue technically contributes to a business’s asset account in the ledger using the principle of double-entry. Nevertheless, service revenue is not considered an asset for accounting purposes, it is rather recorded on the income statement.
We have seen that a balance sheet describes a company’s assets, liabilities, and shareholders’ equity. An income statement provides an overview of all the expenses and revenue of a business in an accounting period. Ultimately, the income statement is where a business will record its net income which includes the service revenue. Having looked at the items that are listed on the balance sheet and those that are listed on the income statement, service revenue is neither an asset nor a liability.
Journal entries for service revenue
Under the principle of double-entry, transactions simultaneously affect two accounts. When a customer makes a payment for their services in cash right away, the cash account is debited while the service revenue account is credited.
In cases whereby services are rendered on account, the asset accounts receivable will be debited while the service revenue account will be credited as shown in the journal entry below:
On the 15th of December, 2020, Davidson Laundry rendered services and collected the full amount of $950. The journal entry for this transaction would be:
On the 18th of December, 2020, the same company rendered laundry services on account for $2,800 to a major customer. This customer is to pay the entire amount after 21 days. The journal entry is as follows:
On the 14th of December, 2021, the company provide services at $1,000, and 40% was paid by the customer. This customer is to pay the remaining balance in 15 days’ time.
The last journal entry is compound in nature, that is more than one item debited or credited. The percentage paid is debited to a cash account while the remaining balance is debited to accounts receivable.
Is service revenue an asset?
For accounting purposes, service revenue is not an asset as it is recorded on the income statement rather than the balance sheet. We have seen an asset as an item that provides economic value to a business or an individual. Revenue on the other hand is the income that comes from the primary services of a business and most companies use it to reinvest in their business, this means that it is not an asset.
Most businesses make use of the accrual accounting method to record service revenue, this means that the revenue is recorded at the occurrence of the transaction rather than when the customer pays. This implies that the income statements will show service revenue even before the customer pays the full balance. However, to handle a pending payment on service completion, it is filed under the category of accounts receivable then once the payment is complete, one can issue a credit to the accounts receivable and make it a debit to the accounts payable thereby balancing both sides.
Although in the accrual method of accounting, service revenue is not an asset, accounts receivable or cash payments that come from services are considered assets on the balance sheet. Service revenue, depending on its stage in life, maybe an asset for a business. New companies should make use of it to grow and establish themselves as leaders within the industry. On the other hand, businesses that are mature can put this fund towards building reserves that will protect the value of the company if managers are unable to secure capital from elsewhere.