Is Service Revenue a Debit or Credit?

The income generated by a company from providing a service is called service revenue. When budgeting or accounting for the service revenue, should you record it as a debit or credit? Is service revenue a debit or credit?

Service revenue is a credit. Like other revenue types, service revenue allows the company to increase its owner’s equity or stockholder’s equity. Service revenue refers to the main revenue account of service-type businesses.

Read on to learn more about service revenue and how to record it as a credit.

Service revenue is a credit. Like any other revenue type, service revenues allow the company to increase its owner’s equity or stockholder’s equity. “Service revenue” refers to the main revenue account of service-type businesses.

Service revenue is an income account. The income statement of a service business is indicated as the first item in the statement’s body.

You may have clients that pay in advance for your services. But this should not yet be treated as service revenue. They only form part of service revenue once you have already rendered the services.

But what if you have already rendered the services, but the clients have not yet paid? How should you treat this? In cases like this, you can report it and treat it as service revenue. Whether it is billed or unbilled, it is already considered as such.

This is how the accrual concept of accounting works. Service revenue is considered earned right after the service has been performed and completed. This is regardless of when the payment is collected.

Why Is Service Revenue a Credit?

In bookkeeping, all revenues are considered credits. This is because all revenues result in an increased owner’s equity or stockholder’s equity.

Remember that the accounting equation, Assets = Liabilities + Owner’s Equity, must be in balance at all times. It is an assumption that all asset accounts have debit balances. It is also an assumption that the liability and owner’s equity accounts both have credit balances.

In other words, an organization that earns revenues will debit an asset account. An example of this is in the form of accounts receivable. Then, it will then have to credit another account. In which case, it can be in the form of service revenue.

The credit balance coming from the service revenues will then be moved. It will eventually form part of the corporation’s retained earnings account or the sole proprietor’s capital account. In the case of corporations, revenues increase the credit balance in one of the stockholders’ equity accounts.

Is Service Revenue an Asset?

By now, you should be able to answer the question, “Is service revenue a credit or debit?” But to understand further, let’s continue discussing service revenue.

To reiterate, service revenue refers to the income a business receives for the service rendered. The charges for this revenue are recorded using the accrual method of accounting.

Accrual accounting records the amount charged when service occurs. You should not record it when the amount is paid. Suffice it to say that all fees for services rendered to date must be included in an income statement, whether they are billed or unbilled.

This type of revenue is indicated at the top of an income statement. It is then separated but included as product sales for the total revenue.

You will then observe that an income statement is not about cash flow. Rather, it is about revenues, expenses, gains, and losses. The income statement includes both the operating and non-operating activities during a certain period of time.

The Revenue Section of an Income Statement

Let’s take a look at how the revenue section of an income statement looks like.

Generation 1 Plumbing Services

Revenues:

Product Sales: $9,875

Service calls: $88,000

Total Revenue: $97,875

In this example, you will notice that the company’s product sales are low. This is because most of their business forms part of the actual service performed for their clients. At the bottom part of the income statement, you can indicate the company’s net income after expenses.

Income Statement: Generation 1 Plumbing Services

Revenues:

Product Sales: $9,875

Service calls: $88,000

Total Revenue: $97,875

Expenses:

Wages $8,000

Vehicle Expenses $2,000

Property Tax $1,000

Insurance $2,000

Supplies $4,500

Telephone $600

Advertising $600

Banking $500

Income Tax Expenses $8,000

Total Expenses: $27,200

Net Income: $70,675

(Revenue – Expenses)

The income statement indicates the direct relationship between expenses and revenue. It allows the company to have a clear picture of whether the business is profitable or not. This is why income statements are essential to every business.

Types of Revenue

There are two types of revenue which are:

Operating Revenue
Non-operating Revenue

Let’s discuss both:

Operating Revenue

The Operating Revenue refers to the amount of income generated from an organization’s primary source of business.

Let’s go back to our sample income statement. The revenue generated by Generation 1 Plumbing Services is considered Operating Revenue. This is because all the services are directly connected to plumbing, which is the nature of the business.

Non-operating Revenue

Businesses have Non-operating Revenues too. The Non-operating Revenue refers to all income generated from the side activities of an organization. An example of this is the company’s investments.

Let’s use our previous example once again:

Supposing that Generation 1 Plumbing Services operates successfully all over Georgia and Florida. Despite their success, the company doesn’t merely rely on its sales to achieve success. Instead, they further grow their money by investing in other businesses.

Generation 1 Plumbing Services invests in stocks of blue-chip companies. They also have investments in bond funds and equity funds. This then forms part of their non-operating revenues.

Businesses do this so that they get to manage their funds well. It’s not all the time that businesses generate high sales. There are scenarios when sales go down too. Even successful companies experience losses, and they also struggle to get up again.

That’s why businesses invest in other businesses too. So that in case they don’t generate enough sales, they still have funds that form part of their non-operating revenue.

Again, is service revenue a debit or credit? Service revenue is a credit. Like other types of revenue, service revenue allows the company to increase its owner’s equity or stockholder’s equity. Service revenue refers to the main revenue account of service-type businesses.

Service Revenue Journal Entries

We know service revenue is a credit. Let’s now take a look at how a journal entry for service revenue looks like. As we discuss, observe the differences in journal entries for the following types of transactions:

Cash
On Account
Partial Payment

Let me give you an example for each of these types of transactions:

1. Cash

For instance, the service rendered will be paid in cash. You should then record the cash amount under the debit column. At the same time, you should record the figures for Service Revenue under the credit column.

For example, let’s say that Generation 1 Plumbing Services rendered services and collected $900 in full. The journal entry should look like this:

Dr.	Cash	900.00
Cr.	Service Revenue		900.00

2. On Account

This time, the client will pay after 15 days from the date the service was rendered. In which case, “Cash” should not be indicated in your journal entry. Instead, it should be treated as an “Accounts Receivable.”

For instance, Generation 1 Plumbing Services rendered their service to one of their clients on May 10, 2021. Then, the whole amount of $3,000 would be paid by their client after 15 days. In which case, the journal entry should look like this:

Dr.	Accounts Receivable	3,000.00
Cr.	Service Revenue		3,000.00

3. Partial Payment

It is also possible that the client will make a partial payment first and pay the remaining balance on a specified date. This all depends on the agreement between the company and the client.

So, let’s say Generation 1 Plumbing Services rendered their service to a client for $3,000. Generation 1 then allowed the client to make an initial payment of 50% of the total amount. Then, the remaining balance will be paid after 15 days.

This is called a compound journal entry. It means that there is more than one item that is either debited and/or credited. The collected amount is considered Cash under the debit column. At the same time, the remaining balance is considered Accounts Receivable, which is under the debit column:

Dr.	Cash	1,500.00
Dr.	Accounts Receivable	1,500.00
Cr.	Service Revenue		3,000.00

Is Service Revenue a Current Asset?

Service revenue is never treated as a current asset for accounting purposes.

Defining the current asset refers to any asset capable of providing economic value to an organization for a whole year or even within a year.

Service revenue only refers to the revenue that an organization earns from the services it rendered. That’s why service revenue is recorded on the income statement instead of the balance sheet.

Organizations use revenues to invest in other assets. And they are used to pay off liabilities and even pay dividends to stockholders. Thus, this is what makes revenues not part of assets.

Current Assets

Let’s briefly discuss current assets to give you a clearer idea:

Current assets are not recorded on the income statement. Instead, organizations record them on the balance sheet, including liabilities and equity.

Similarly, the balance sheet will allow you to identify which ones are current liabilities and which ones are long-term liabilities. When you say current liabilities, these refer to short-term debts. You must pay for this within a year. Any debt paid in more than a year is under long-term liabilities.

The current ratio refers to the ratio of current assets to current liabilities. It is used to establish the ability of an organization to fulfill its short-term obligations.

To identify the current ratio, the current assets must be divided by the current liabilities. The equation is as follows:

Current ratio = current assets / current liabilities

It is important to note too that you can consider tangible assets as current assets.

In terms of intangible assets, they provide economic value to an organization. However, you can’t convert it easily into cash in one year. Examples of intangible assets are goodwill, intellectual property, copyrights, and trademarks, among others.

Non-current Assets

If there are current assets, there are also what we call non-current assets. This type of asset provides economic value to an organization for longer than one year. Examples of this are equipment, property, and plants. Long-term investments and intangible assets are also under non-current assets.

Current Liabilities

In essence, current liabilities are recognized as the opposite of current assets. They decrease the spending power of a business for a year.

Examples of current liabilities include the following:

Accounts payable,
Owed income taxes,
Dividends, and
Short-term debts.

And most of the time, these are resolved using the current assets.

There are instances in which current liabilities exceed a company’s current assets. In which case, it could lead to liquidity issues.

Conclusion – Is Service Revenue a Credit or Debit?

As a journal entry, you must indicate the service revenue amount in the credit column. Its corresponding amount in cash or accounts receivable must be indicated in the debit column-this is how you should present this type of revenue.

It is also important to remember that service revenue is not a current asset. Because it does not provide economic value to a business for a year or within a year; instead, it merely refers to the earnings directly generated from the services rendered.

The said reason is why service revenue is on the income statement and not on the balance sheet. And those recorded on the balance sheet include assets, liabilities, and equity.

It is important to take note of this information, especially if you are in charge of bookkeeping. There is no room for error when making journal entries. A single error will, unfortunately, result in an unbalanced income statement.