Is Service Revenue a Debit or Credit?

The primary purpose of any business entity is to make a profit through revenue generation activities. Therefore, they perform different operations like manufacturing & trading of goods or provision of services. In general, revenue is defined as the earnings of any business entity from normal business operations that can provide services or sell goods.

However, the business entity might earn revenue from other than the normal business operations like capital gain on the sale of assets, selling a part of business, or return on investment in security. Therefore, the recognition and recording of the revenue are governed by certain accounting principles and regulations.

Normal business is defined as the main activity identified in the business entity’s prospectus and memorandum of association. The revenue generated from operations other than the normal business is usually treated is indirect revenue. Whereas, the revenue generated from the normal business is treated as direct revenue.

Many people have ambiguity about what service revenue is and what is the accounting treatment. Therefore we will discuss the debit or credit nature of service revenue as well as the financial treatment. Recording of the service revenue by the business entities involved in the trading of goods and commodities as well as the service sector will be discussed in this article.

So let’s get into it.

What Is Service Revenue?

Service revenue is defined as the sales or earnings of a business entity that are related to the services provided to the clients/customers. The term service revenue is used for the revenue recognized in lieu of the services that have already been provided to the clients, irrespective of the cash received. In other words, the revenue earned against service provision is called service revenue.

Let’s take an example to understand the scope of service revenue. A financial consulting firm will be providing financial services and solutions to clients. Therefore, the revenue generated by the firm will be treated as the service revenue.

Similarly, a cleaning service provider will also earn service revenue against the cleaning services provided to its clients as agreed upon between the two parties. The service revenue is nothing different from the normal revenue earned by a company to cut it short.

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What Is Treated As Service Revenue?

Service revenue of a business entity providing services can come from any of the following heads:

Project Revenue

For instance, an audit firm works independently and is hired by different entities to perform an annual audit. As soon as the audit completes, the contract is concluded and the firm gets paid for services. Similarly, project accountants are hired to provide services for specific projects. The revenue earned by the project accountants is also project revenue. If a company provides project-based services, the service revenue earned will be called project revenue.

Service Revenue

Service revenue is the revenue generated by providing a specific service: a one-time cleaning service, financial consultation, tax return filing, spa, salon, makeup artist, etc. The nature of business earning service revenue can vary a lot. For instance, if you stop by a local mechanic to get your car tire fixed, service revenue will be against a specific service. If you want to get a car wash, you will have to pay separate charges that will be different from the former.

Recurring Revenue

Recurring revenue also comes under the service revenue when the company has recurring clients. For instance, subscription-based businesses, insurance companies, monthly rent, annual licensing fees, etc., all come under the scope of recurring revenue.

Transaction-Based Revenue

Finally, transaction-based revenue is also treated as service revenue. It can be a single-time service purchase and usually not an ongoing one. For instance, a car selling company provides an additional car protection service that is given when a new car is sold. Such types of services are usually one-time, and proceeds are recorded as transaction-based revenue.

Types of Service Revenue

The service revenue can be further categorized into operating and non-operating service revenue.

Operating Revenue

All the service revenue earned by a company providing services as a normal business or primary business activity is treated as the operating revenue. The operating revenue is the revenue that can be compared year-to-year in the financial statements of a business entity. For instance, the cleaning service provider will have operating service revenue from proceeds received against cleaning services.

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Non-Operating Revenue

Non-operating revenue is usually defined as the transactions or economic events that are infrequent, unusual, one-time, and not from the normal business operations. In other words, the service revenues generated by a company other than the primary business activity are treated as non-operating service revenue.

Is Service Revenue Asset Or Liability?

The earned service revenue is recognized and recorded as the revenue in the income statement or income of profit & loss of a business entity. Service revenue is neither an asset nor a liability. However, the service revenues can be treated as assets or liabilities when overdue or received in advance. We will discuss this in the next sections.

Is Service Revenue a Debit or Credit?

The normal balance of service revenue is credit. It means that when a business entity has earned the service revenue, it’s recorded on the credit side of the trial balance, in journal entry and ledger. Besides, the nature of revenue is also credit.

The service revenue is credited in the books of accounts under the double-entry system. When the company earns revenue, it increases the equity of the entity and will be recorded as a credit in the income statement and journal entries.

How To Record Service Revenue?

The accounting method recognizes and records the service revenue in a business entity’s accounting books and financial statements. Under the accrual system, revenue or expense is recognized and recorded when the services have been received or provided. The recognition is irrespective of when cash is received or paid.

Journal Entries

The following general entry will be passed in the accounting books when a company will earn service revenue(operating or non-operating):

DateDescriptionL.FDebit($)Credit($)
 Cash Account/ Bank Account     xxx 
                                Service Revenue Earned     xxx
 (Cash received against the services provided)   

Income Statement

If the service revenue is the operating revenue of a business entity, it’s written on the top of the income statement. The operating costs are subtracted to find the operating profit. However, if the service revenue is from non-operating activities, the service revenue is written after the calculation of the operating profit.

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Balance Sheet

The service revenue is not recorded independently in an entity’s balance sheet. However, the part of the profit is recorded as an increase in equity.

What If Service Revenue Received But Services Not Provided?

Since the accrual system of accounting is followed by business entities, the revenue will only be recognized when the services have been provided to the client. Therefore, if the service revenue is received in advance, but services are yet to be provided, it will be the company’s liability.

Journal Entries

The journal entry to record the transaction will be as follow:

DateDescriptionL.FDebit($)Credit($)
 Cash Account/ Bank Account     xxx 
                                Deferred Revenue     xxx
 (Cash received against the services to be provided in the future)   

Income Statement

No entry is made for the deferred revenue in the company’s income statement. It will only be recognized as a revenue of a business entity when services are delivered.

Balance Sheet

The deferred revenue is recorded on the liability side of the balance sheet to show that the company owes the amount in lieu of the services yet to be provided.

What If Services Provided But Revenue Not Received?

The revenue that has been earned but not received is called accrued revenue in the language of accounting. Such revenue is recorded and recognized under the accrual system of accounting. However, the company’s account receivables are increased as the cash collection will be made in the future.

Journal Entries

The journal entry for the accrued revenue is as follows:

DateDescriptionL.FDebit($)Credit($)
 Account Receivables/Debtor account     xxx 
                               Accrued Revenue / Service Revenue Earned     xxx
 (account receivable against the services provided)   

Income Statement

If the service revenue is the operating revenue of a business entity, it’s written on the top of the income statement. The operating costs are subtracted to find the operating profit. However, if the service revenue is from non-operating activities, the service revenue is written after the calculation of the operating profit.

Balance Sheet

The cash has not been received against the service provided. Therefore, an entity’s balance sheet will record the account receivables or revenue receivables.

Wrap Up

We have discussed everything about the service revenue, whether it’s operating or non-operating. It’s important to note that the manufacturing companies and the service-providing companies can earn service revenue. However, the categorization of revenue as operating or non-operating revenue is made in both cases. Besides, the normal balance of the service revenue is credit.