Definition: A service company is a business that generates income by providing services instead of selling physical products. A good example of a service company is a public accounting firm. They earn revenues by preparing income tax returns, performing audit and asset services, and even doing bookkeeping work.
What Does Service Company Mean?
Accounting firms don’t sell physical products like retailers and merchandisers. Instead, they sell their services to clients and traditionally charge by the hour. This is true with almost all professional firms. Lawyers typically have set hourly rates and charge clients based on how long it takes to perform the services. In essence, these firms are really selling their time.
There are many other businesses other than professional firms that are in the service industry. Take a lawn care and landscaping business for example. You pay them to come to your house and perform services. You don’t get a physical product from a lawn care business.
Since service companies don’t actually sell products, they don’t typically carry inventory on their balance sheets because they don’t own any. Accounting for service companies is simpler than retailers because no inventory needs to be tracked and no cost of goods sold needs to be calculated.
Instead, posting a journal entry to record service revenue simply focuses on the cash received and the revenue earned. When an attorney bills a client for his or her services he records the sale with a debit to accounts receivable and a credit to service income. Once the client pays his bill, the attorney debits cash and credits the accounts receivable account.
Service income is reported on the income statement just like sales income for a retailer.