What is service revenue?
Service Revenue: It’s exactly what it sounds like the part of a business’s net income that comes from its services.
This payment method is not the same as buying something because the customer is not buying an actual or digital item. It doesn’t include payments on interest, gains or losses on investments, or money made from shipping goods.
Some common examples of service income are
- Fees for consulting
- Setting up software
- Tax and bookkeeping services
- Work with web creation
- Marketing help
- A monthly fee service that you sign up for
For service-based companies like agencies and consulting firms, “service revenue” will make up most or all of their income.
Companies selling goods (e.g., e-commerce, SaaS, manufacturing) usually make money from goods and services. Knowing what share of the total income comes from these income streams is helpful.
Synonyms
- Business service revenue
- Service-based revenue
Different Types of Service Fees
Operating and non-operating revenue are the two main types of service revenue accounts.
To correctly track and report your company’s performance, you need to know the difference between them and when to include them on financial statements.
Operating Income
Operating revenue, also called operating income, is the primary way a company makes money from its main business activities. This kind of service revenue comes straight from the company’s main business, which is providing those services.
Operating revenue is a crucial measure of a business’s financial health because it shows how well the business plan works and how well it can profit from its core services.
Fees that an accounting firm gets for doing tax preparation and auditing work are an example of operating service income.
- The money that a marketing firm makes by running the advertising efforts of other businesses
- Money that an IT consulting company makes by helping people with their technology problems and giving them advice
Business owners can find growth and improvement opportunities by monitoring revenue trends. They can also see how well new services or changes in pricing strategy are working.
Non-Operating Income
On the other hand, non-operating revenue is money that a company makes from things other than its main business tasks. Even though this income may not be as directly linked to service sales, it still helps a business’s finances.
Since they aren’t from the company’s main line of business, non-operating revenues tend to be less steady and dependable than operating revenues.
There are many types of non-operating service revenues, such as rent from renting out a part of a company’s office space, royalties from licensing a company’s intellectual property to another business, gains from the sale of long-term investments or assets like real estate or equipment, and currency exchange gains.
Non-operating revenue can be a good way for businesses to make extra money, but owners should know that it might not be as stable or reliable as running revenue.
So, depending too much on non-operating revenue models makes the company’s finances less stable and more challenging to determine how well its core services work.
Using the method of accrual accounting to record service income
Accrual-based accounting is accounting that records income and costs based on earned income instead of when the business gets a payment.
Service-based companies can more accurately record service revenue with accrual accounting because it matches service revenue with customer service costs.
This way of keeping track of money says that service income is recognized as soon as the work is done and billed, even if payments are made at different times.
Receivables for services provided (called “accounts payable”) are shown on the balance sheet as service revenues. It is expected to show this amount separately from other accounts since it is not cash.
How to Put Service Income on an Income Statement
Here are the steps you need to take to make a record in the journal for service revenues:
Find the event that brings in money.
Take note of when a job has been rendered, even if payment has not yet been received.
In your accounting records, this event makes the entry for service income.
Write down the service fee.
A double-entry system is used for the accrual method. To record the service income, you make an entry in your general ledger.
Most of the time, you will credit (add to) an accounts receivable account and debit (take away from) a service income account. This process lets the other company know that the work was done and that they should be paid for it.
- Take $1,000 out of accounts receivable.
- Income from credit services: $1,000
Write down the payment
When the customer pays for the work, write the cash receipt in your books. To do this, you must debit (add money to) your cash account and credit (take money out of) your accounts payable account.
- Take $1,000 out of cash
- Add $1,000 to Accounts Receivable.
Keep an eye on your outstanding debts.
Check your accounts receivable amounts often to see if any payments are due. This can help you keep track of your cash flow and ensure you get paid on time for your services.
Take into account accounts that can’t be paid.
Sometimes, you might not be able to get the total amount of service income that you have recorded as accounts receivable.
In this case, you’ll need to change your accounting to represent the amount you can’t get back. Usually, this is done by taking money out of an account for doubtful accounts and putting it into an account for accounts due.
- Allowance to debit for questionable accounts: $200
- Add $200 to Accounts Receivable
Example of Service Revenue
This is an example of an income sheet for a made-up service business:
| Income Statement | Amount ($) |
| Revenue | |
| Service Revenue Operating Revenue
Expenses, Salaries and Wages Rent$ Utilities Marketing Insurance Office Supplies Depreciation Miscellaneous Expenses Total Expenses Net Income |
12,000
$5,000 $125,000 $60,000 $12,000 $4,000 $6,000 $3,000 $1,500 $94,000 $31,000 |
This example of an income statement gives an overview of the company’s financial health by showing how much money it made and how much it spent.
The business makes $125,000 annually, with $120,000 from service sales and $5,000 from other sources. The net income of $31,000 after all costs are considered shows that the business is making money.
Problems with Figuring Out Service Revenue
It’s not always easy to figure out how much a service makes. The ways that service income is measured and recognized can be very complicated, depending on the type of service.
How to Keep Track of Deferred Revenue
Payments made ahead of time for services that haven’t been given yet are called deferred revenue or unearned revenue.
The accounting team can’t record income in cash and accrual accounting until the service has been provided. If a business gets paid ahead of time, it needs to keep careful track of and account for payments that aren’t yet due. They change their financial records when services are rendered, and money is made.
Not managing deferred revenue correctly can lead to wrong financial records and overstated revenue numbers.
Writing in a journal by hand
For tracking income, doing things by hand can take a long time and lead to mistakes.
Service revenue estimates can be wrong if there are mistakes in the entered data, wrong calculations, or records that are not kept consistently.
Businesses can improve audit awareness and reduce manual work by automating revenue recognition. This frees up finance teams to work on more critical tasks.
Recording Changes to Accounts for Revenue
Businesses face many changes that can affect the money they make from their services or projects. These changes can include price changes, customer contract changes, or changes to their services.
When every service revenue journal record can be changed, it can take more time to ensure all the changes are made correctly.
How to Compare Cash Flow and Service Revenue
When it comes to accounting, service income is different from cash receipts. This difference can be challenging for businesses to understand when figuring out their financial health.
Service revenue shows how well the company is doing based on its services but doesn’t directly show how much cash is available for running the business.
How to Make More Money from Services
Even for companies that sell hardware or software, service income can be a very profitable way to make money.
Here are some quick tips that will help you make more money from your service:
- Offer services that help people use your product more quickly, like implementing it in stages or giving each employee their training.
- Upsell and cross-sell related services to customers you already have. This will make their experience with your business more valuable.
- Give excellent customer service to get people to return and spread the word about your business.
- Package services to meet the wants of a wide range of customers.
- Form strategic relationships with businesses that work well with yours to reach more customers and give them better solutions.
- Make your price options flexible. This can help you get more customers.
- Ask customers for feedback and use it to make things better and fix any problems. This will help you build long-term relationships with customers.
Using computers to do service revenue accounting
The software can do about 75% of accounting work automatically, saving companies daily hours.
Most service-specific accounting platforms let you do things like send invoices, keep track of expenses, handle accounts receivable, make financial reports, and connect to other business tools like CRM, CPQ software, time-tracking tools, and project management systems.
When accountants use software, they won’t have to worry about the service revenue formula, delayed revenue, or other complicated accounting issues.
Businesses can stay in line with the rules, report income on time, and better understand their financial health with software options.
