For businesses that don’t sell a physical product, income is usually from services rendered. A service is an intangible product, and income derived from selling your services must be recorded in the accounting ledger. A journal entry in an accounting journal is a business transaction. A double-entry journal entry takes the form of a ledger with two columns; a debit column, and a credit column. It’s called double-entry because every entry into one column requires a corresponding entry into the other column.
Example of Services Rendered in Double-Entry Method
For example, if a company borrows $1,000 from the bank, the company's asset account Cash is increased with a debit entry of $1,000. That’s one entry. The second entry requires that the company's liability account Loans Payable is increased with a credit entry of $1,000. If the company repays $500 of the loan, the company will decrease the amount in its Cash account with a credit entry of $500 and will also reduce the balance in its Loan Payable account with a debit entry of $500.
When Does Services Rendered Count as Income?
Service revenue counts as income when the services are rendered. Often, services are provided, and payment is received at a later time after an invoice is sent. The payment at that time may be in full, or it may be a partial payment. As soon services are rendered, even if they haven't been paid for yet, that is considered to be service revenue.
It is important to note that advanced collections before services are rendered are not treated as service revenue yet. They become part of service revenue only when the services are rendered.
Formatting the Services Rendered Journal Entry
To enter services rendered in an accounting journal, first create the format of the entry. Entries should include information such as the date of service, an explanation of the entry and the option to place it into a debit or credit column. The first column includes the account number and account name into which the entry is recorded. The second column contains the debit amount to be entered. The third column contains the credit amount to be entered. Indent the account name and number line if it is a credit.
When a customer owes you cash for services rendered, the business has an asset for the amount due. In the double-entry method, the Cash account will receive a debit in the amount of the service to be paid for. The Service Revenue column will receive a credit in the same amount.
Let’s look at an example of services that are rendered for $500. The journal entry would show a debit to Cash of $500 and a credit to Service Revenue for $500. If the customer pays only $100, then Cash receives a credit of $100. Accounts Receivable receives a credit of $400, and Service Revenue receives a debit of $500. In this example, the portion collected is Cash while the remaining balance is debited to Accounts Receivable.
Note that the total debit to Service Revenue is equal to the amount entered in credit for cash received and amount still due. The double-entry method requires that the debit amounts always equal the credit amounts.