Is Service Revenue an Asset?
Service revenue is a financial term that refers to the income a company makes by providing a service. If you're a service company of any kind, whether you do hairstyling or landscaping, it's important to know the basics about service revenue. Service revenue is not an asset itself. However, service revenue does contribute to your "asset account" in your ledger if you use the double-entry system of accounting.
Skynova's accounting software can help you keep track of your earnings and expenses, allowing for clearly organized accounting and faster calculation of service revenue. The below article goes into further detail about what service revenue is, why it matters for your business, and how to record it. We also give you service revenue examples.
What Is Service Revenue?
Service revenue is a type of revenue that you record on your business's income statements. It tells you how much money your business made through the provision of services within a defined accounting period (e.g., monthly, quarterly, or annually). The charges for service revenue are recorded on an accrual basis under the accrual accounting method. Service revenue plus product revenue equals your business's total revenue during a defined accounting period.
For example, let's say you run a hair salon. You provide services like haircuts, colors, and perms. However, you also sell products like shampoo, conditioner, and hairspray. Looking at your Q1 2021 accounting period (January, February, and March 2021), you earned a total of $10,000 from services (your service revenue) and $1,500 from selling products (your product or sales revenue). Your total revenue on your company's income statement will be $11,500.
The amount of service revenue you make is displayed at the top of your income statements. It appears as an operating revenue account. Operating revenue refers to income generated from your business's primary activities. If you run a hair salon, for instance, hair services would be considered operating revenue. If you engage in a side activity (e.g., you invest in a haircare brand), your investment earns you a profit — this is considered non-operating revenue.
Is Service Revenue an Asset or Liability?
Service revenue itself is not an asset. This can be confusing because service revenue technically contributes to your "asset account" in your ledger when using the double-entry accounting method. Nonetheless, for financial accounting purposes, service revenue is not considered an asset. In accounting definitions, a current asset (like accounts receivable) is any asset that will provide an economic value for or within one year.
For accounting purposes, revenue is recorded on the income statement rather than on a balance sheet. A balance sheet describes a company's assets, liabilities, and stockholders' or shareholders' equity. An income statement provides an overview of all of your business's expenses and revenue in an accounting time period. The income statement is ultimately where you will record your company's net income, which will include service revenue.
How Do You Find Service Revenue?
To find a business's service revenue, you have to check the income statement (not the balance sheet). The service revenue can be found at the top of a business's income statement. It will likely be categorized under "Revenue," which will then be divided into two categories: service versus product or sales revenue. As mentioned, service revenue refers to income generated through the provision of services, while product or sales revenue refers to income generated through the sale of products.
Here's a sample income statement for a fictional service business, Holly's Hair Salon:
|Holly's Hair Salon, LLC|
Income Statement for the Year Ending Dec. 31, 2020
|Service revenue (haircut, color, styling)||$200,000|
|Sales revenue (Holly's-branded shampoo, conditioner, hairspray)||$10,000|
|Cost of goods sold (Holly's-branded shampoo, conditioner, hairspray)||$25,000|
|Income tax expenses (taxpayer)||$25,000|
How Do You Record Service Revenue on an Income Statement?
Creating income statements is easy if you regularly record your earnings and expenses. Skynova's accounting software simplifies the process, giving you a streamlined platform to keep track of your business financials. To add service revenue to your income statement, simply follow the below steps.
Step 1: Determine Service Revenue
To calculate your service revenue, add up the income you have generated in providing a service. In the case of Holly's Hair Salon, for example, those services included haircuts, coloring, and styling. Defining a list of your services along with a corresponding price list in advance can help make this step faster. Tally up all the money you've earned from your services accordingly. That's your earned service revenue.
Note that there is also something called unearned service revenue. This refers to revenue a business receives before a service has been conducted. For example, if Holly is booked for a special event like wedding-day hair for a 10-person bridal party, she might ask this fee to be paid in advance. This unearned service revenue is reported as a liability on the business's balance sheet. After the service is performed, unearned revenue becomes revenue on the income statement.
Step 2: Record Your Service Revenue
The service revenue is reported under the "Revenue" section of the income statement. This is found at the top of the income statement, above the "Expenses" category. As mentioned, the revenue section is usually divided into two categories: service revenue and sales/product revenue. Make sure to input your service revenue in the proper category. The different types of revenue are then added together to get the total revenue.
What Is a Service Revenue Example?
Above, we provided an annual income statement example for Holly's Hair Salon. To get into greater detail, let's take a look at what service revenue might look like for Holly on a monthly basis. The first step is for Holly to identify what accounting period she's recording service revenue for — let's say she's recording service revenue for January 2021.
Holly has carefully recorded all receipts tracking her income throughout January 2021. She can now use those to calculate her service revenue. Holly's Hair Salon is closed on New Year's Day, so she has no revenue to record on that day. On Jan. 2, Holly earned $500 performing haircut, color, and styling services. Here's what her accounting journal entry would like for that day:
On Jan. 3, Holly earned $250 performing haircut, color, and styling services. Here's what her accounting journal entry would look like now, with a separate line entry for the new day:
On Jan. 4, Holly earned $600 performing haircut, color, and styling services. Here's what her accounting journal entry would like now, with a separate line item for the new day:
Holly will continue to record her service revenue throughout the month. At month's end, she will be able to see how much she earned through the provision of services in total. She can then create a monthly income statement, similar to the annual income statement example shown above — but in this case, just for the month of January. Here's a preview of what the revenue section might look like:
|Holly's Hair Salon, LLC
Income Statement for January 2021
|Service revenue (haircut, color, styling)||$12,000|
|Sales revenue (Holly's-branded shampoo, conditioner, hairspray)||$1,000|
Let Skynova Help You Manage Your Small Business Financial Statements
Small business accounting doesn't have to be a drag. Skynova helps small business owners streamline their finances with easy-to-use accounting software. Skynova also offers handy business templates to help you organize your finances, such as invoice templates. With these products, you can better track your income and expenses, making it easier to calculate your service revenue, gross revenue, and net revenue.
Notice to the Reader
The content within this article is meant to serve as general information about service revenue. The details and examples described above may not apply to your specific situation. Always consult with a licensed accountant or tax professional regarding personalized bookkeeping or tax advice.