Everything You Need To Know About Service Revenue
Let's start with the surprising fact that annually 4 million startups start their operations. However, not many of them grow to become enterprises. In 2021, 14,347 businesses filed for bankruptcy. This can result from a poor recording of financial statements and faulty accounting methods.
But you can safeguard your business and sales growth and how much your company generates with proven service revenue in accounting strategies. A robust accounting and financial plan can protect your business goals and current assets and enable small businesses to thrive and conduct profitability analysis.
Service revenue definition
Service revenue appears as a one-line element in a company's income statement directly related to how much a company earns. It is most businesses' income for providing and completing a service. However, service revenue does not include the transaction of shipment of goods or interest income on current assets. It'd be a good idea to add it to the statement whether the customer pays for the services provided or not.
Service revenue is integral for service-based businesses' financial accounts and income statements. It tells a business owner how much income they generate from selling services within a fixed period.
Always add service revenues to the income statement, not the balance sheet. Usually, you have to record service revenue as a separate line item because it is not categorized as cash. If you want to find the service revenue of a business for company evaluation, try to look at the top section of the income statement. If you fail to see it, look near or under the liabilities section because businesses can use it to pay current expenses.
What type of account is service revenue?
Your nature of services and operations also influence the service revenue account type. Service revenue is not recorded under permanent accounts as it is received directly after providing a service. Therefore, it is considered an operating expense. It also depends on your business model to classify it as a non-operating or operating revenue.
Types of service revenue
Understanding the types of service revenue is necessary because it will help you identify the service revenue in the income statements or enable you to place them correctly in your statement. The following are the types of service revenue:
- Recurring service revenue
Recurring revenue is used for ongoing services that result in recurring payments. It includes monthly rent, retainer, licensing fees, and subscriptions. Moreover, you can use recurring revenue to predict future sales and financial forecasting based on current transactions' value.
- Project-based service revenue
Project revenue includes a transaction that comes from individual projects. It is often estimated before the project and can continue for months. When a project spans multiple accounting periods, the finance teams divide the payment into different quarters and revenue sections.
- Transaction-based service revenue
These transactions are one-time payments from a single project, appointment, or consultation. In many cases, transaction-based service revenue is not ongoing.
How to calculate service revenue?
Calculating service revenue sales is different as it has no COGS and other factors. The general revenue formula consists of the number of units sold multiplied by the average unit price. But in the case of services, you have to multiply the number of customers by the average service price. You can use the following formula:
Is service revenue credit or debit?
Suppose you are receiving revenue for a service in advance. In that case, you should record service revenue under credit in the service revenue income statement, and for an asset account, refer to it as a deferred expense. In contrast, you must record these transactions as debits in the income statements if you bill clients after work.
Is service revenue a current liability?
Current liabilities include taxes, salaries, accounts payable, and deferred revenues. As mentioned above, you can refer to services as deferred revenue under the asset account. You can say that service revenues can be a current liability under certain conditions.
It is crucial to monitor how much service revenue is present, its classification, and its calculation methods. When your accounting year ends, you must have a transparent, clear, and understandable income statement. This is only possible when you place the service revenue of your company in the right section at every time period.