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Service Company

Brian Krogol
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Alright. So let's discuss the difference between a service company and a merchandizing company. So a service company well, they provide services to their customers, right? They're gonna provide services. And when we talk about a service company, there's no physical good. So there's no actual tangible thing that's being handed to the customer. They're providing a service to the customer. So examples of service type companies is a tutoring company. Like when we did our clutch tutoring example, they were providing a service housecleaning shipping lawyers. Right. In all of these situations, there's no physical tangible good that's being transferred to the customer. You're doing, you're performing some sort of service for the customer And that is how we're going to discuss our revenue here. So when we talk about revenue for a service company, we have to remember first and foremost our revenue recognition principle and this revenue recognition principle is true for all companies. So let's see how it relates to a service company. Remember that revenue is recognized when the company fulfills its end of the bargain, right? That's when we're gonna make the journal entry to say, hey, we made revenue. When we do our end of the bargain has nothing to do with the cash being received. So a service company, it's gonna earn its revenue when it performs the service right? When it does whatever it's gonna do for the customer, that's when it earns a revenue. When the tutoring session is complete that the revenue is earned. When you clean the house, the revenue is earned when you finish shipping the supplies, right? When you handle the case for the for the client. If you're a lawyer in all these cases, you earn the revenue once you perform the service has nothing to do with the cash. So let's look at the this example squeaky cleaners cleaned squirts shirts at a price of $20. Right? So squeaky cleaners is going to make a journal entry when they clean the shirts right? They finished cleaning the shirts. Regardless of whether or not they've been paid by squirt, they're gonna make this journal entry. Right? So let's assume that squirt did pay them. Well let's let's assume that they did it on account. Right, squirt hasn't even paid them yet because the money doesn't matter. But they clean the shirt so they earned the revenue. So the journal entry. Well since it's on account they didn't receive cash they received an iou and accounts receivable. So our debit in this entry is going to be for accounts receivable And it's gonna be in that amount of $20. So that's our debit, right? We're increasing accounts receivable by $20 and we're going to credit our revenue in this case let's say service revenue because it's a service we provided, we'll call it service revenue, it could be sales revenue or just revenue. It doesn't really matter. I'm just trying to be a little more transparent here. Okay so we credit the revenue $20. That increases our revenue by 20 revenues go up with the credit. So how does this affect our balance sheet? Well, our accounts receivable, right. The accounts receivable is an asset. So we're going to see that the this goes up by 20, right? This doesn't affect our liabilities. There's nobody we owe anything to. And this revenue is increasing our equity in the company, the revenue over here. So we see we're still balanced, right? The assets went up, get out of the way, the assets went up by 20, the equity went up by 20, so the equation stays balanced. Right? Pretty simple. It's a simple example. So what I wanna do now is I want to take this over to a merchandizing company and let's see what the difference is there. Alright, let's do that in the next video.