Service Companies Income Statements
Many people are under the mistaken impression that service companies are a dime a dozen. While there is no formal organization devoted to rating service companies, there are some factors that most people tend to look at when judging a particular company. These ratings can provide valuable insights into the quality of service provided by a company.
There are four major factors that most people tend to consider when judging service companies. The first is revenue, which is determined by looking at how much a company brings in per month. Service businesses include merchandising companies, repair and shipping companies, and various other types of firms with an independent mode of operation. Revenue per quarter may indicate the health of a service company's finances, but is not as reliable as the gross revenues reported for a retail establishment. Income statements for all kind of company vary greatly in a number of ways, including the kinds of expenses incurred, cost of products sold, and even net income generated.
A second common factor that service companies consider when rating their financial health is the profit made on sales of their goods sold. While revenue can fluctuate depending upon how well the product sells, profit is usually a constant regardless of how well the merchandise sells. Merchandising companies, repair services, and other types of merchandisers all have to keep careful records of who buys their goods, how they were sold, how much they sold them for, and so forth. When applying the principles of income and profit to these accounts, service companies have their own distinct accounting requirements.
The third factor that most accountants look at is the accounting record of the service companies they're rating. This accounts for both income and profit, but is even more important to service companies than is revenue. The records of professional firms that sell products directly to the public include customer satisfaction data, such as whether or not customers are satisfied with the products or services that they bought and the extent to which they were pleased with them. Digital Waves on returns can also be considered. Both of these kinds of information are important in determining whether the company is making money, staying in business, or otherwise.
The final item on the accounting cycle that most accountants consider is the end result, or the net profit or loss results. These are known as the Statement of Operations. A service company might make enough revenue to cover its costs and still have a profit remaining, although it might have paid some of its expenses out-of-pocket. The net profit statement, therefore, represents the difference between revenue and expenses. A service company might have higher net profits from a particular activity than another kind of company, so there will be differences between financial statements for different merchandising companies.
Merchandise accounts receivable represent the difference between sales and accounts payable. Accounts receivable usually covers items that customers pay right away for their purchases. Examples of this might be a customer who buy a particular item from a store, pays later, and then asks for his credit card number to be refunded. If the store has an automatic system for crediting purchased items, the customer would only need to enter in the date of purchase and the amount paid for that item. This section of the income statements, called the purchase accounting cycle, is called line item accounting.
Income statement data that is presented on financial statements of other types of merchandising companies will usually also show a trial balance. This refers to the difference between current assets and current liabilities. The trial balance allows the company to determine whether it is generating enough sales to cover its costs and unpaid debts at the end of the current reporting period. If not, it makes adjustments to the current assets and liabilities to come up with the amount needed to pay off the debts. This can be done by making a one-time gain or loss estimate as well as recording the gross selling price of the merchandise plus its tax and surcharges rather than the net actual selling price.
Sometimes service companies are also called fulfillment companies or contract manufacturers. A service companies income statement is a record of how much money they make from providing a service, whether it is selling merchandise or processing payments for other customers. Because processing payments involves a great deal of accounting, service companies usually provide financial statements that use many different accounting software programs, rather than just keeping a single book. Instead of using separate ledgers for income statements, most service companies use one master ledger, which tracks all of the company's financial transactions. This may also include bank reconciliation reports.
