A service company provides a service to its customers, not a product; by providing services, a service company generates money. An accounting firm is an excellent example of a service company. Accountants earn revenue by doing books, auditing firms, and assets, and preparing income tax returns.
Service Company Definition
Service companies do not sell products that you can physically touch like you can with a retailer or merchant. Service companies sell their services to the client and usually charge them by the hour for the service rendered. This is true for travel agents, for example, travel agents charge a service fee for their clients when making a booking on their behalf. The travel agent is selling their time to the client and thus billing them for the time spent making the booking.
Service Company Accounting
A typical service company will not sell products and thus doesn’t keep inventory on their balance sheet, because they don’t have any stock. To account for a service company is easier than accounting for retailers because no inventory needs to be tracked, and you do not have to calculate the cost of goods.
To create a journal entry into a service companies records, you will focus on the amount of cash that was received and the revenue that was earned. When billing a client, you will debit the account receivables and credit the service income journal. When your client pays the bill, you will debit the cash and credit the account receivables account.
Billing the client
| Accounts Receivable | |
|---|---|
| DT | CT |
| xx |
| Service Income | |
|---|---|
| DT | CT |
| xx |
The client pays the bill
| Accounts Receivable | |
|---|---|
| DT | CT |
| xx |
| Cash | |
|---|---|
| DT | CT |
| xx |
You report service income on your income statement, just like sales for a retailer will be reported.
Service Company Example
Example 1
There a variety of different businesses in the service industry. Take, for example, a spa, you will go to a spa to get a massage or a manicure. You will pay the resort to perform the service, but you do not get a physical product from the spa.
Example 2
A lawyer will bill you for the time spent arguing your case, you will not get a physical product after the case is over. You will have a successful or unsuccessful outcome on your lawsuit.
Service Company Conclusion
- A service company provides a service to its customers, not a product; by providing services, a service company generates money.
- Service companies do not sell products that you can physically touch as a retailer or merchant would.
- Service companies sell their services to the client and usually charge them by the hour for the service rendered.
- To account for a service company is easier than accounting for retailers
- To create a journal entry into a service companies records, you will focus on the amount of cash that was received and the revenue that was earned.
- You report service income on your income statement, just like sales for a retailer will be reported.