What components of revenues and expenses are differ ent between merchandising and service companies?

1.How do the components of revenues and expenses differ between amerchandising company and a service company?

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Merchandising Business:A merchandise business sells merchandise (tangible goods).They must have stockinventory e.g.: clothing business, grocery business etc. Merchandise Company will makerevenue and profits off the inventory they sell. Merchandise-based businesses depend onthe sale of tangible goods to make money.Service Business:A service business sells intangible things to make revenue. A Service Company does nothave stock inventory. They run their business by providing services to its customers e.g.:consultancy, training or maintenance.

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Financial statements reveal a lot about a company's financial health. Different types of companies have different types of financial statements. If you are interested in analyzing the balance sheets of different types of companies, you need to understand the key differences. For example, merchandising companies and service companies share the same balance sheet format. However, there are some important differences in the types of accounts listed on each.

Merchandising Company

1. Merchandising companies deal with the resale of items. Typically, merchandising companies are referred to as retailers or wholesalers. Wholesale companies sell products to retailers. Retailers, in turn, sell the product to the end consumer (the customer) at a higher price than they paid when they purchased it. Merchandising companies usually have two types of expenses -- expenses related to the products they are selling, called cost of goods sold, and expenses related to the day-to-day operations of the business. The latter would include rent, utilities, office supplies and staff salaries.

Service Company

1. Service companies also deal in products. However, their products are usually intangible. Service companies provide services for their customers. This type of company includes law firms, accounting firms, salons and spas, among others. For example, a service product is a tax return prepared by an accounting firm. A product for a salon could include a haircut or manicure. Typically, service companies have only expenses relating to the daily operations of the business.

Balance Sheet Differences

1. Because merchandising companies and service companies sell different things, they also have some balance sheet differences. The balance sheet lists all of the company's assets, liabilities and equity. Both types of company will still maintain these sections. However, there is one main difference in the accounts listed. This difference is found in the asset section. Merchandising companies will have an asset for inventory, whereas service companies do not. This is listed as a current asset. Other differences can include the types of accounts payable a merchandising company has. For example, a merchandising company may have a standing account payable to a wholesale company for the purchase of its products. A service company may have a service revenue receivable account for expected payment for services provided.

Balance Sheet Similarities

1. Even though merchandising companies and service companies have one main difference on their respective balance sheets, overall the balance sheets are nearly the same. The balance sheet is still divided into "assets" and "liabilities and equity." In the assets section, similar items remain, such as buildings, accumulated depreciation, vehicles and prepaid insurance. In the liabilities and equity section, many of the usual balance sheet items can be found on the balance sheets of both types of company. These can include notes payable, accounts payable and retained earnings.

The primary difference between a merchandising and a service-based business is the presence of inventory. Merchandising businesses sell goods to customer, whereas service-based businesses do not. The companies' financial statements, including the income statements, must reflect this difference.

Merchandising Income Statement

When you review a merchandising income statement while simultaneously viewing a merchandising income statement, the first difference you'll notice is that the latter carries an account called "cost of goods sold," while the former does not. Service-based businesses don't carry inventory and therefore don't use this account. For a merchandising company, cost of goods sold or COGS is an expense account that refers to the cost of purchasing the inventory and shipping it to the appropriate locations for selling to customers.

COGS is classified as a business expense, and will impact how much profit the business makes from the sale of its products, according to Freshbooks.

Calculating Cost of Goods Sold

To calculate cost of goods sold in a merchandising company, calculate the beginning inventory and purchases throughout the year, then subtract the ending inventory. The Street gives the following simple formula:

Cost of Goods Sold = (Beginning Inventory + Cost of Purchases) – Ending Inventory

The beginning inventory is the amount that's present on the previous year's income statement, while ending inventory is the amount available for sale as of the date of the current year's income statement. Purchases include any shipping costs that you incur from the manufacturer or distributor. Cost of goods sold is usually one of the greatest expenses that a merchandising company incurs and one of the most important accounts on the income statement.

For example, suppose your inventory costs at the beginning of the year were $100,000. Your business made $20,000 worth of purchases and had ending inventory costs of $75,000. Using the COGS formula, you calculate that:

$100,000 + $20,000 = $120,000 - $75,000 = $45,000

The cost of goods sold over the year $45,000.

Calculating Net Income

The main purpose of the income statement for a service company is to list a company's revenues and expenses, and to present the net income of a business for the year. In both types of income statements, net income is simply the revenues, or sales, of the company minus all operating expenses. A service-based business will usually experience a decline in net income largely due to a decline in revenue, rather than an increase in expenses.

In a merchandising company, a decrease in net income is just as likely to occur because of an increase in expenses as a decrease in revenues. The income statements of both types of companies help to pinpoint which area the company needs to focus on.

Manufacturing Income Statement

The income statement from a manufacturing company closely resembles that of the merchandising company, however there are a few added expenses. Cost of goods sold for a manufacturing company is much more complex as the company must take into account the cost of raw materials, labor and overhead that creates the finished goods. Some companies choose to present all of this information on their income statements, while others only present it as a final total for cost of goods sold.

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