Is Service Revenue an Asset? Breaking down the Income Statement

Service revenue is the income a company generates from providing a service. The amount is displayed at the top of an income statement and is added to the revenue from product earnings to show a company’s total revenue during a specific time period. In a double entry system of accounting, service revenue bookkeeping entries reflect an increase in a company’s asset account.

Here’s What We’ll Cover:

What is Service Revenue?

What Are the Types of Revenue?

Why Are Service Revenues a Credit?

What Is Service Revenue?

Service Revenue is income a company receives for performing a requested activity. The charges for such revenue are recorded under the accrual method of accounting. Accrual accounting records the dollar amounts for a charge when a transaction occurs, not when the cash is actually exchanged. This means all fees for services performed to date can be included in an income statement, even if not all the bills have been sent out to clients yet.

Service revenue appears at the top of an income statement, and is separated but added to the product sales for a revenue total. An income statement is not concerned with cash flow, it is concerned with revenues, gains, expenses and losses in both the operating and non-operating activities of the business during a specific period of time.

A revenue section of an income statement, for a service-oriented company, could look something like this:

Pete’s Plumbing

Revenues
Product Sales: $9,875
Service calls: $88,000

Total Revenue: $97,875

You’ll notice that Pete does very little in product sales, that’s because most of his business is in the actual service of fixing things for his customers. The bottom of his income statement will show you his company’s net income, after expenses have been removed.

Income Statement: Pete’s Plumbing

Revenues
Product Sales: $9,875
Service calls: $88,000

Total Revenue: $97,875

Expenses
Wages (part time help) $8,000
Vehicle Expenses $2,000
Property Tax (home office) $1,000
Insurance $2,000
Supplies $4500
Telephone $600
Advertising (Facebook) $600
Banking $500
Income Tax Expenses $8000

Total Expenses: $27,200

Net Income: $70,675
(Revenue – Expenses)

Income statements are very important to a company’s management, as it shows the direct relationship between revenue and expenses, and if the company is profitable.

What Are the Types of Revenue?

There are two types of revenue, “Operating Revenue” and “Non-Operating Revenue”:

Operating Revenue

This is the amount of income generated from a company’s primary source of business. For instance, revenue from Pete’s Plumbing would be considered “Operating Revenue” because everything he makes is directly related to his plumbing business.

Non-Operating Revenue

This is the amount of income generated from a company’s side activity, such as investments. Let’s say Pete builds his local enterprise into a plumbing empire with a chain of well outfitted plumbing vans manned by experienced personnel, operating in five states. He invests some of the company’s profits into other businesses. The profits returned on those investments would be considered “Non-Operating” revenue.

Why Are Service Revenues a Credit?

When accountants record transactions in a company’s general ledger, typically they use a double entry system of accounting for their bookkeeping. A double entry system requires every entry to have an additional corresponding entry to a different account. Consider the word “double” in “double entry” standing for “debit” and “credit”. The two totals for each must balance.

For more on the double entry system of accounting, click here.

Let’s say Pete does a plumbing job that he charges his client $600.00 for. When doing his bookkeeping, Pete will record this credit under the heading “Service Revenues”. Pete also needs to balance this credit with a debit, so he will debit his “Accounts Receivable” (an asset account) with $600.00.

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