Is service revenue a permanent account?
Is service revenue a permanent account? Service revenue is the income that a company generates from rendering a service. A company’s revenue is found at the top of a company’s income statement and categorized into service revenue and sales revenue. The majority of businesses record the service revenue using the accrual accounting method, in which, revenue is recorded when the transaction occurs rather than when the customer pays for it. That is, service revenue can be shown on the income statement even before a customer pays the full balance for the service received.
Accountants list service revenue at the top of the income statement on a separate line item that is specific to revenue, below the sales revenue line. Therefore, regardless of whether the service is pending or paid, service revenue will always go on the income statement and not the balance sheet. Hence, making it a temporary account. In this article, we will discuss service revenue and why it is not a permanent account. But first, let’s have basic knowledge of service revenue in accounting.
Related: Service Revenue – Debit or Credit?
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What is service revenue?
When a company or business performs an activity that is requested by a customer or client, the money the customer pays is Service Revenue. This amount is recorded under the accrual method of accounting. The accrual accounting records the amounts for the service charge when the transaction occurred, and not when the cash is actually exchanged. As a result, all fees for services performed to date can be included in an income statement, regardless of whether the bills have been sent out to the clients or not.
Service revenue is found at the top of an income statement, separated from product sales but added to it to get the company’s total revenue. An income statement is concerned with transactions associated with revenues, gains, expenses and losses in both the operating and non-operating activities of the business during a specific period of time.
For instance, a revenue section of an income statement, for a service-oriented business, would look like this:
JENNY’S SPA
| Revenues | |
|---|---|
| Product Sales | $9,875 |
| Service calls | $88,000 |
| Total Revenue | $97,875 |
As seen in the annual financial record of Jenny’s spa, it is noticeable that Jenny does very little in product sales because most of her business is in the actual service of performing massage therapy, facials, foot therapy, pedicures, acupuncture, and manicures to her customers. The bottom line figure of her income statement will show the net income of her business after expenses have been removed.
Conclusively, the service revenue accounts under the accrual basis of accounting report the amount that a company earns during the time period indicated in the heading of the income statement. This account would include work that has been completed whether or not it was billed. Service revenue is therefore an operating revenue account and will appear at the beginning of the company’s income statement.
Related: Service Revenue Asset or Liability?
Example of service revenue
Above, we provided a brief income statement example for Jenny’s spa. To get into greater detail, let’s look at an example of what service revenue might look like for Jenny’s spa on a monthly basis.
The first step is for Jenny to identify what accounting period she’s recording service revenue for; let’s assume she is recording service revenue for January 2022. Say, Jenny has carefully recorded all receipts tracking her income throughout January 2022. She can now use those receipts to calculate her service revenue.
Jenny’s Spa is closed on New Year’s Day, so she has no revenue to record on that day. On Jan 2nd, she earned $500 performing facials, manicures, and foot therapy services. This is what her accounting journal entry would like for that day:
| DATE | ACCOUNT | DEBIT | CREDIT |
|---|---|---|---|
| 2/01/2022 | Cash | $500 | |
| Service Revenue | $500 |
On the 3rd of Jan, she earned $250 performing massage therapy, manicures, and pedicures services. This is what her accounting journal entry would look like now. Note, there will be a separate line entry for the new day:
| ACCOUNT | DATE | DEBIT | CREDIT |
|---|---|---|---|
| Cash | 2/01/2022 | $500 | |
| 3/01/2022 | $250 | ||
| Service Revenue | $750 |
On the 4th of Jan, Jenny earned $600 performing facials, manicures, aromatherapy, and acupuncture services. With a separate line item for the new day, this is what her accounting journal entry would like now:
| ACCOUNT | DATE | DEBIT | CREDIT |
|---|---|---|---|
| Cash | 2/01/2022 | $500 | |
| 3/01/2022 | $250 | ||
| 4/01/2022 | $600 | ||
| Service Revenue | $1,350 |
Jenny will continue to record her service revenue like that throughout the month so that at the end of the month, she will be able to see how much she has earned through the service revenue in total.
Then, she can now create a monthly income statement, similar to the annual income statement but in this case, just for the month of January. Below is a sample of what the revenue section of the income statement might look like:
| JENNY’S SPA, LLC Income Statement for January 2022 | |
|---|---|
| Revenue: | |
| Sales revenue (Jenny’s- branded face masks, eye masks, body scrubs, skin hydrating shower oil) | $3,000 |
| Service Revenue (facials, manicures, foot therapy, massage therapy, pedicures services, aromatherapy, acupuncture) | $12,000 |
| Total revenue | $15,000 |
See also: Accumulated depreciation is what type of account?
What are permanent and temporary accounts?
Permanent accounts are measured cumulatively and refer to transactions associated with the asset, liability, and equity accounts. They are reported on the balance sheet as asset accounts, liability accounts, or capital (equity) accounts. Therefore, permanent accounts would include:
- Asset accounts such as Cash, Prepaid Expenses, Accounts Receivable, Inventories, Equipment, Furniture and Fixtures, etc as well as contra-asset accounts like Accumulated Depreciation and Allowance for Bad Debts
- Liability accounts such as Interest Payable, Loans Payable, Notes Payable, Accounts Payable, Rent Payable, and Utilities Payable
- Capital accounts such as capital stock, reserve accounts, and retained earnings in corporations as well as partners’ capital accounts in partnerships and owner’s capital accounts in a sole proprietorship.
From our understanding of permanent accounts, service revenue does not fall into this category. It is not an asset or liability, and neither is it equity. Moreso, it is not reported on the balance sheet. This means that service revenue is not a permanent account. Since service revenue is not a permanent account, is it a temporary account?
Temporary accounts are accounts that are reported on the income statement. These accounts begin each fiscal year with a zero balance and the ending balance at the end of the year is shifted to a different account, which is used again in the next fiscal year to accumulate a new set of transactions. The ending balances of temporary accounts at the end of the fiscal year are shifted to the retained earnings account. This process of shifting the balances out is known as closing an account.
Temporary accounts also called nominal accounts are used to compile transactions that impact the profit or loss of a business during a year. Hence, the balances in these accounts are used to create the company’s income statement. Therefore, temporary accounts include revenue accounts as well as contra-revenue accounts, expense accounts, gain and loss, and the income summary account that appears on the income statement. Hence, examples of such accounts are sales revenue, service revenue, cost of goods sold, sales discounts, sales return and allowance, compensation expense, supplies expense accounts, loss on assets sold account, etc.
This means that temporary accounts include transactions that are related to revenue and expense which are aggregated into the income statement. Since service revenue is a revenue account that appears on the income statement, it is a temporary account and not a permanent account.
See also: Is Cost of Goods Sold a Debit or Credit? (COGS)
Is service revenue a permanent account?
Service revenue is the income generated through the provision of services. Therefore, in order to find a business’s service revenue, you have to check the income statement and not the company’s balance sheet. Even though some people confuse service revenue is recorded as an asset, it is not an asset. This can be confusing because it technically contributes to the asset account in the ledger when using the double-entry accounting method.
However, for financial accounting purposes, service revenue is not considered an asset or permanent account. In accounting, an asset will provide an economic value within a year or less and is reported on the balance sheet. Service revenue is not an asset, rather it is an income that comes from a business’s primary service which most companies use to reinvest in the company.
Therefore, for accounting purposes, revenue is not reported as a permanent account on the balance sheet but recorded on the income statement as a temporary account. Nevertheless, even though service revenue isn’t an asset in accrual accounting, cash payments or accounts receivable that come from services are recorded as assets on a balance sheet.
