Service revenue is generated when a business supplies its services to a customer. The services can either be provided for immediate cash payment or more usually the services are provided on account and invoiced to the customer at a later date.
The invoicing of services on account means that an amount of money will be owed by the customer to the business, and this is referred to as a trade accounts receivable or trade debtor.
Suppose for example, a business provides web design services on account for the amount of 2,500, then the bookkeeping journal entry will be as follows.
Sold Services on Account Journal Entry
The accounting records will show the following bookkeeping entries for the web design services sold on account:
Sold Services on Account Bookkeeping Entries Explained
The customer owes you money for the services until they are paid for. The business now has an asset (trade accounts receivable or trade debtor) for the amount due.
A service is provided to the customer and the service revenue is taken to the income statement.
The Accounting Equation for Services on Account
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
In this case one asset (accounts receivable) increases representing money owed by the customer, this increase is balanced by the increase in owners equity. The credit to the income statement for the service revenue, increases the profit which increases the retained earnings and therefore the owners equity in the business.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.