Published in: Accounting

Service revenue debit or credit?

Author Obotu Agape Oguche

Published on: October 19, 2022

Is service revenue debit or credit? Businesses generate revenue from the sale of goods or from providing services to their clients. Hence, revenue is the total amount of income that is realized from the sale of goods and provision of services related to the main operations of a business. The total revenue of a company is reported at the top of the company’s income statement as a top-line figure and is usually categorized into service revenue and sales revenue. Service revenue on the income statement, therefore, represents the income that a company makes from rendering a service.

At the end of the accounting year, the credit balance of the revenue account has to be closed and then transferred to the capital account, thus increasing the business owner’s equity. This means that in business, revenue will cause an increase in equity and since a business’s equity has a natural credit balance, sales revenue and service revenue will be recorded not as a debit but as a credit. In this article, we will discuss what credit and debit mean and why service revenue is not recorded as a debit but as a credit. First, let us have an understanding of service revenue.

Related: Is Sales Discount Debit or Credit?

A company’s income statement is only concerned with the transactions that are associated with revenues, gains, expenses and losses in both the operating and non-operating activities of a business during a specific period of time. Accountants would normally 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.

For example, the revenue section of a service-oriented business’s income statement would look like this:

ABC Animal Care Ltd

As seen in the annual financial record of ABC Animal Care Ltd, it is noticeable that the company does very little in product sales because most of its business is in the actual service of performing pet boarding, bathing and grooming animals, diagnostic and therapeutic service, surgical services on animals, emergency care, behavioral counseling, dietary counseling, treatment and administration of drugs. The bottom line figure of the company’s income statement will then show the net income of the business after expenses have been removed.

As seen in the example above, service revenue is therefore a revenue account and will appear at the beginning of the company’s income statement. Hence, service revenue is a temporary account because it is reported on the income statement.

When a company or business provides a service to a customer or client, the amount of money that is billed to the customer is the Service Revenue earned. Several businesses record the service revenue using the accrual accounting method. In this accounting method, revenue is recorded when the transaction occurs rather than when the customer pays for it. Therefore, a service revenue that has been earned is recorded on the income statement regardless of whether the service is pending or paid.

This means that, under the accrual method of accounting, the amount charged for the service provided is recorded when the transaction occurred, and not when the cash is actually exchanged. Therefore, all charges 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.

Under the accrual basis of accounting, the service revenue accounts report the amount that a company earns during the time period that is indicated in the heading of the income statement. The service revenue account would therefore include work that has been completed, whether or not it was billed. This simply means that service revenue can be reported on the income statement even before a customer pays the full balance for the service received.

Now, that we have an understanding of what service revenue is; is service revenue a debit or credit? Let’s have a look at debit and credit in accounting to have a proper understanding of the journal entry for service revenue.

See also: Is equipment debit or credit?

Debit and credit entry in accounting

Every transaction in business has a monetary impact on the financial statements of a company. When accounting for business proceedings, we record the numbers in two accounts, under the debit and credit columns. In bookkeeping, knowing which account should be debited and which should be credited will ensure that bookkeepers have an easier time balancing their books. One always has to ensure that their entries are correct and accurate every time a transaction is completed in business.

Debits and credits are very crucial for the bookkeeping of a business to balance out correctly. A debit entry serves to cause an increase in asset or expense accounts while reducing revenue, equity, or liability accounts. A credit entry, on the other hand, serves to cause an increase in revenue, equity, or liability accounts while decreasing expense or asset accounts.

Take for instance when reporting service revenue, assume that Company XYZ generates $5,000 for a service that it rendered. This will cause an increase in the business’s assets (cash account), and as such, this increase in the company’s assets will be recorded as a debit of $5000 to Cash. Recall that, a debit entry serves to cause an increase in the asset account, this is why the cash account is increased with a debit entry of $5000.

In accounting, it is compulsory for all debit entries to have credit entries. That is, if a debit entry is made for a certain amount, a credit entry must be made for the same amount. Due to this, the $5,000 generated for the service rendered will be recorded also as a $5,000 credit entry to the Service Revenue account. Also, since a credit entry has been recorded in the Service Revenue account, the equity will effectively increase due to the credit entry.

Furthermore, if a company renders a service to a client that does not pay immediately, the company records an increase in an asset account (Accounts Receivable) with a debit entry, and also records an increase in Service Revenue, as a credit entry.

Now, let’s assume Company XYZ has a client that purchases its services for, $2,700 but is allowed to pay the company over the course of 30 days. A $2,700 debit entry will have to be made to the business’s Accounts Receivable. Even though the service revenue has not yet been received, it must be recorded because it was earned. This means that the company will also record a $2,700 credit to the Service Revenue account causing the owner’s equity to increase.

When this client eventually pays the $2,700 debt as cash to the company, two accounts again are affected, the Accounts Receivable account will be decreased by a credit entry of $2,700 and the Cash account will be increased by a debit entry of the same amount.

As seen from the preceding illustration, debits and credits are used as a way to record any and all transactions within a business’s chart of accounts. For accounting purposes, when a transaction is recorded, all debit entries must have a credit entry that corresponds with it while equaling the same amount. That is, every transaction in business has to be exchanged for something else that has the exact same value. Hence, the total of the debit and credit entries for any transaction must always equal each other so that the accounting transaction is considered to be in balance.

Debit and credit explained

In conclusion, a debit entry is recorded to always add a positive number to the journal, while a credit entry is recorded to add a negative number. In the actual journal entries, you won’t see these entries written as pluses and minuses, rather they are represented with the left-side and right-side formats. A debit will always be positioned on the left side of a ledger while a credit entry will always be positioned on the right side of the ledger.

Using debit and credit entry in a two-column transaction recording format happens to be the most essential of all controls over accounting accuracy. Therefore, in double-entry bookkeeping, credits and debits would occur simultaneously in every financial transaction. They are used to record transactions in a company’s chart of accounts that either increases or decrease the account. There are 5 major accounts in a company’s Charts of Accounts (COA). The table below lists and explains these 5 major accounts and how a debit or credit entry causes the account to increase or decrease.

As seen in the table above, the Service revenue which was highlighted is a revenue account. Hence, it decreases with a debit entry and increases with a credit entry.

Related: Service Revenue Asset or Liability?

Now that we have an understanding of what service revenue, debit, and credit are in financial reporting, we can now answer the big question ‘is service revenue a debit or credit?’.

Credit entries cause an increase in equity, liability, or revenue accounts while decreasing expense or asset accounts. Therefore, since revenues cause the owner’s equity to increase, service revenue as a revenue account will be recorded as a credit and not a debit. At the end of the accounting year, sales revenue and service revenue will be added together to give the total revenue; this revenue account will be closed and transferred to the owner’s capital account (owner’s equity) or Retained Earnings (stockholders’ equity account), thereby increasing equity.

The bottom line is, service revenue is not reported as a debit but as credit, because it represents the income of a company during an accounting period and this income has an impact on the company’s equity. Therefore, as a company generates revenue, its equity increases. Since an increase in equity accounts is a credit, revenues will definitely also be a credit entry. Therefore, service revenue will have a natural credit balance.

Service revenue: debits and credit journal entries

Under the accrual accounting system, revenue or expense is recognized and reported when the services or expenditure has been made, irrespective of when cash is received or paid.

Debit and credit journal entry for when service revenue is earned

When service revenue has been earned by a company, the journal entry that will be passed into the accounting books is as follows:

Now, if this service revenue is the operating revenue of the business, it will be written on the top of the income statement and in order to find the operating profit, the operating costs will be subtracted from the revenue. However, if this service revenue is from non-operating activities, the service revenue will be written after the calculation of the operating profit. On the balance sheet, this service revenue is not recorded independently, rather a part of the profit is recorded as an increase in equity.

Debit and credit journal entry for when service revenue is received but not provided

How will service revenue be recorded when it has been received but the service has not been provided to the customer? Since several businesses record revenue using the accrual system of accounting, service revenue will only be recognized when the services have been provided to the customer. Therefore, if a service revenue has been received in advance, but the services are yet to be provided, it becomes a company’s liability.

Therefore, the journal entry for received service revenue that has not yet been provided will be as follows:

In the company’s income statement, no entry is made for the deferred revenue. It will only be recognized on the income statement as service revenue of the business when the paid services are delivered. Until then, the deferred revenue is reported on the liability side of the balance sheet. This will show that the business owes the reported amount in lieu of the services yet to be provided.

Debit and credit journal entry for when service is provided but revenue is not received

What happens in a situation whereby a business renders services but has not received the revenue? In such instances, the revenue that has been earned but not received is referred to as accrued revenue. In accounting, such revenue is recorded and recognized under the accrual system of accounting. As the money is paid in the future, the company’s account receivables are increased.

The journal entry for service revenue that has been earned but not received is as follows:

If this service revenue is the operating revenue of the business, it will be written on the top of the income statement and in order to find the operating profit, the operating costs will be subtracted from the revenue. However, if this service revenue is from non-operating activities, the service revenue will be written after the calculation of the operating profit. Since the cash against the service provided has not been received, it will be recorded on the balance sheet as account receivables or revenue receivables.

Related: Is Cost of Goods Sold a Debit or Credit? (COGS)

Why service revenue is not recorded as a debit but as a credit

The reason why a service revenue will be a credit entry all falls back to the accounting equation. Service revenue is not posted as a debit but as credit, because it causes an increase to the equity account that has a natural credit balance. An increase in equity can only result from transactions that are credited. The foundation of this reasoning is the accounting equation:

Assets = Liabilities + Equity

The accounting equation above appears in the structure of a balance sheet, where the asset account that has a natural debit balance offsets liabilities and equity accounts that has a natural credit balance. When a company provides a service, the service revenue earned (in the absence of any offsetting expenses) automatically increases profits and this profit increases equity. Therefore, service revenue accounts usually have credit balances that are increased with a credit entry. Hence, their balances in a T-account will be on the right-hand side of the ledger.

See also: Treasury stock debit or credit?

Service revenue debit or credit? (example)

Initially, when we were discussing service revenue, we provided a brief revenue account financial statement example for ABC Animal Care Ltd. To get into greater detail and have a practical look at how service revenue is entered not as a debit but as a credit, let’s look at an example of how the service revenue journal entry for ABC Animal Care Ltd might look on a monthly basis.

Let’s assume ABC Animal Care Ltd is recording service revenue for January 2022. Say, the owner has carefully recorded all receipts tracking the company’s income throughout January 2022. The owner of the company can now use those receipts to calculate his service revenue.

ABC Animal Care Ltd is closed on New Year’s Day, so it recorded no revenue on that day. On Jan 2nd, the company earned $1000 from surgical services and emergency care. This is what the accounting journal entry would look like for that day:

On the 3rd of Jan, ABC Animal Care Ltd earned $500 from behavioral counseling, diagnostic and therapeutic services. This is what the accounting journal entry would look like now. Note, there will be a separate line entry for this new date:

On the 4th of Jan, ABC Animal Care Ltd earned $2200 rendering dietary counseling, treatment, administration of drugs, diagnostic and therapeutic service, and surgical services on animals. With a separate line item for this new day, this is what the accounting journal entry would look like now:

ABC Animal Care Ltd will continue to record its service revenue like that throughout the month, then at the end of the month, the income statement will show how much has been earned through the service revenue in total.

Related: Common stock: debit or credit?