Let’s say your business started out selling appliances, but you found that maintaining and repairing them is a great business, too. Now you have two distinct revenue streams: one from product sales and one from selling services. Keeping track of the different revenue sources is key to effectively managing your business.
Learn what service revenue is, how to manage it, and tips to ensure it contributes to your business’s growth.
What is service revenue?
Service revenue is the income a company generates from performing an activity, such as repairing appliances, offering skin care consultations, or providing computer data storage. It’s the service-based equivalent to sales revenue from product sales—and the two types of sales are often paired. Selling services offers the opportunity to cross-sell products and vice versa.
A service business could be any company where the primary income comes from services rendered, like law firms, medical practices, airlines, hotels, carpet cleaning, lawn care, and brokerage and investment advisers. This type of business dominates the US economy. As of 2024, the value of all services provided by private businesses accounted for almost three-quarters of US GDP, according to the Federal Reserve Bank of St. Louis.
Importance of calculating service revenue
If service revenues are the main source of your company’s total revenue, calculating them provides insight into how well your business is performing and helps steer overall strategy.
If you sell both products and services, tracking each revenue stream allows you to compare and see which has greater growth potential and profitability—or spot inefficiencies and areas for improvement. Properly recording all services revenue can also help you forecast total revenue and plan accordingly.
Types of service revenue
Service revenue is recorded at the top of an income statement for a specific time period and is classified in one of two ways:
Operating revenue
Operating revenue is the income generated by a company’s main business of selling services. It’s a key yardstick of a company’s financial performance, showing its ability to generate income. A service company may break down operating revenue in different ways—for example, based on individual transactions such as appliance repairs, recurring revenue from subscriptions, or long-term project revenue with timed payments from customers.
Non-operating revenue
Non-operating revenue is income from other services or sources that aren’t essential to the business. It’s often less predictable than operating revenue because it’s from irregular sources like rental income, royalties from licensing intellectual property, dividends, investments, and sales of assets.
How to record service revenue
Businesses generally record service revenue under the accrual method of accounting, similar to product revenue. Accrual accounting records revenue when a transaction occurs, regardless of when payment is received.
A business prepares financial statements, such as the income statement and balance sheet, by creating and maintaining a general ledger. There it tracks all transactions through double-entry accounting, where each transaction is recorded twice, as a debit and a credit. Double-entry bookkeeping accounts for all money moving in and out of the business, with the sum of debits on the left side of the ledger equaling the sum of credits on the right side.
Transactions are recorded in the ledger according to five basic account types: revenue or expenses on the income statement; and as assets, liabilities, or equity on the balance sheet.
Recording service revenue involves the following steps:
1. Identify the service
Recognize when a service has been provided, even if the payment has not yet been received. This will prompt the corresponding debit and credit entries for service revenue in the ledger.
2. Record the debit
Typically, you would debit one of two asset accounts—either cash if payment is made or accounts receivable if payment is pending. For example, a hypothetical business, ABC Services Co., provides computer network services for a company for $10,000 a month. In double-entry accounting, ABC would enter $10,000 as a debit, either as cash if the customer pays in full when the work is completed, or as accounts receivable if payment is pending within 30 days.
3. Record the credit
Service revenue is a revenue account, so ABC would enter $10,000 as a credit to revenue, balancing the $10,000 debit. Debits and credits show the connection between the two financial statements. While a transaction’s revenue is recorded for the income statement, its payment status, cash paid or pending, is recorded as an asset for the balance sheet. This recording method regards all revenue, including service revenue, as an asset.
4. Account for unearned revenue
With accrual accounting, you count revenue when a service is provided. Money received in advance for services not yet provided is called unearned or deferred revenue. For example, companies need to treat subscriptions paid in advance as a liability on the balance sheet. As customers receive periodic rendering of their service, part of the liability is reduced, and some of the deferred revenue is credited to the income statement.
Any service your business provides in a given period, such as a quarter, may be included in revenue for that period’s income statement, regardless of payment status.
Tips for tracking service revenue
Here are a few tips for tracking service revenue:
Automate
Automate service revenue calculations to avoid manual record-keeping, which is prone to human error. Accounting software programs specifically for service businesses typically provide features such as invoicing, expense tracking, accounts receivable management, financial reporting, and integration with other business tools like customer relationship management (CRM) software.
Monitor accounts receivable
Keep close tabs on customer payments and manage the size of accounts receivable— your customers’ IOUs—to ensure timely collection of service revenue. Track the number of days customers take to pay up, consider imposing penalties, and be aware of any that may become delinquent.
This will help you avoid your own cash-flow problems and potentially generate additional interest income. Some delinquent accounts may become uncollectible, so be prepared to account for them as possible losses, with corresponding debits and credits.
Understand the accounting treatment
Smaller businesses may be able to get by with cash accounting, which is like putting cash in a cookie jar and taking money out to pay expenses. However, once a business grows and lets customers buy on credit (as well as buying its own supplies and inventory on credit), it will need to use accrual accounting.
Accrual accounting is more complex. It requires constant attention and comparison of revenue and expenses against cash receipts and payments, but it accurately reflects a business’s financial condition.
Use service KPIs
Understand and use key performance indicators (KPIs) relevant to service-oriented businesses. Metrics including average order value (AOV) and customer lifetime value (CLV) can provide insights about your business’s revenue stream and which services are most in demand.
Service revenue FAQ
What is service revenue?
Service revenue refers to revenue received by a business for performing a service, rather than selling products. Many companies have revenue from both services and products, but services play a much bigger role in the US economy, accounting for about 75% of the country’s GDP.
How do you classify service revenue?
Service revenue appears on the income statement as either operating revenue, which is generated by a company’s main business, or non-operating revenue, which may be irregular or incidental to the company’s business. Deferred revenue, or money received in advance for future services, is listed on the balance sheet as a liability. As the service is provided, the deferred revenue is gradually recognized on the income statement, and the liability is reduced.
How do you calculate service revenue?
Accounting software typically includes a bookkeeping ledger that can accurately tally every service provided and the associated revenue, so there’s no need for manual calculation. For a manual estimate, use the service revenue formula: the number of customers in a given period multiplied by the average price for services.
