Journal Entry for Sale of Service
Sale of Service is a business transaction in that a company provides service to a customer in exchange for money.
Every company has a primary objective to make a profit from its business operation. This can be done by selling goods or services to customers in exchange for revenue. In order for the company to make a profit, the revenue generated have to be more than the total expenses incurred from running the business. The expenses include the cost of goods sold, salaries, rentals, and many others. Once the company settles all its expenses, it will be left with profit that will go into its pocket.
When a company sells a service to a customer, the sale is typically recognized on the income statement when the service is performed. This is known as an accrual basis of accounting. Under this method, revenue is recognized when it is earned, even if the cash has not yet been received from the customer. This ensures that financial statements accurately reflect a company’s current financial position.
A sale is typically recorded on a company’s income statement when the risks and rewards of ownership have been transferred to the buyer. This generally occurs when goods are delivered or when services are rendered. If a sale is made on credit, it may be recorded on the income statement when the sale is made or when the cash is received, depending on the company’s accounting policy. Regardless of when it is recorded, sale results in revenue for the company.
The sale of service is also the same as other types of sales which need to report on the income statement. The company has to record the sale of the service when the service is performed for the customers. The other side of the transaction will impact the cash inflow or accounts receivable.
Journal Entry for Sale of Service
The company is required to record revenue on the income statement when the service has been completed for the customers. If the service takes more than one accounting period, the company needs to allocate the revenue base on the work completed in each period.
We need to follow the accounting matching principle. The revenue and corresponding expenses must be recorded in the same accounting period. It allows the financial statement user to compare revenue and expenses and make the proper decision.
In addition to the above criteria, the accounting standard requires the company to make proper analysis before recording revenue on the income statement. The company is allowed to record revenue when the following criteria are met:
- Identify the contract with customers: Both seller and buyer must come up to one agreement before the sale and purchase of service. The terms in the contract must be understood by both parties.
- Identify contract obligation: The seller must understand the obligation which needs to provide to customers.
- Determine the price: It is the service price and the method of payment.
- Allocate the price to the performance obligation: The contract obligation must be breakdown based on the price. It is very important when the company cannot complete the whole contract in one accounting period. So the revenue record will depend on the contractual obligation and its price tag.
- Record revenue when the performance obligations are fulfilled: The revenue is recorded when the company has completed the service for the customers.
The journal entry is debiting accounts receivable and credit sale of service.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 000 | |
| Service Revenue | 000 |
The accounts receivable will record as current assets on the balance sheet, it happens when the company sells on credit. The service revenue will be recorded on the income statement.
Example
Company ABC is the consulting service provider. The company has performed service costs $ 230,000 to the client during the year. This is the credit sale. Please prepare a journal entry for the sale of services.
ABC has performed the service for the client, and they are fully completed. The company has to record revenue on the income statement.
The journal entry is debiting accounts receivable $ 230,000 and credit sales $ 230,000.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 230,000 | |
| Service Revenue | 230,000 |