How does accounting for a merchandising company differ from a service company?
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If you are an accountant working with two companies—one a pure service business, like a consulting firm, and the other a pure merchandising business, like a department store—you’ll notice one glaring difference right away on the balance sheet: inventory. Inventory is goods held for sale during the ordinary course of business. Merchandising businesses work with inventory whereas service companies have no inventory. Show
Home DepotLook at this partial (assets only) balance sheet from Home Depot. Merchandise inventories are listed as a current asset because they will turn into cash within a short period of time, and they also represent one of the largest categories of assets ($14.531 billion), second only to the investment in buildings, equipment, and land ($22.77 billion). Other current assets1,040890 THE HOME DEPOT INC.CONSOLIDATED BALANCE SHEETin millions, except per share dataFebruary 2, 2020February 3, 2019Category, AssetsSubcategory, Current Assets: Cash and cash equivalents$ 2,133$ 1,778 Receivables, net2,1061,936 Merchandise inventories14,53113,925 Total current assetsSingle line 19,810Double lineSingle line 18,529Double lineNet property and equipment22,77022,375Operating lease right-of-use assets5,595—Goodwill2,2542,252Other Assets807847Total assetsSingle line $ 51,236 Double lineSingle line $ 44,003 Double line Home Depot is a good example of a retail merchandising business. It’s also a corporation and publicly traded, which means we can easily obtain the financial statements. These statements are prepared according to GAAP and audited (by KPMG, LLP). You can look at the full annual report and SEC Form 10-K. Manufacturing companies have inventory as well; in fact, they have three major categories of inventory: raw materials, work-in-process, and finished goods. Finished goods are sold to distributors (wholesale) and end up on the shelf of your local merchandising company or in the shopping cart of your favorite online retailer. Accounting for manufacturing inventories, because they are moving and changing as they go through the process, is much more complicated than accounting for merchandising inventory, so we’ll stick with the basics for now: buying and selling inventory that is ready for the end user. The following video provides an overview of the difference between merchandising and service companies and their respective accounting needs. You can view the transcript for “Introduction to Merchandise Inventory (Financial Accounting Tutorial #28)” here (opens in new window). Practice Question: Merchandisers versus Service Enterprises InventoryOn a used car lot, cars are the inventory. Clothing is the inventory in a clothing store. For a real estate developer, inventory is homes waiting to be sold. At the clothing store, the building would not be considered inventory, even if the owner of the store decided to sell it for some reason (say the owner is selling the entire business or moving to a new location). In addition, any uniform clothing that staff are required to wear would be an asset, not inventory. Only items held for sale during the ordinary course of business are considered inventory. Let’s take a moment to talk about how inventory is purchased. GeyerLet’s say you work as an accountant for a company called Geyer that installs upgraded, vocal interface GPS/Sirius/Mobile–enabled sound systems in just about any vehicle. Shanice, the boss, is running a web promotion for the new Digital XPS-101 and expects to sell about 200 of them. She asks the company’s purchasing agent, Malik, to email Bryan Wholesale, Co., her normal supplier, and order 200 to have on hand. Geyer has a long-standing account with Bryan, so all Malik needs to do is to give the salesperson at Bryan a P.O. (purchase order) number and they will process the order, ship it, and send an invoice. This is what happens:
The invoice your company received from Bryan contains details of a sale, noting things like the number of units sold, unit price, total price billed, terms of sale, and manner of shipment. As the purchasing agent, Malik may not actually see the invoice, but if he did, it would look something like this: See the invoice long description here. For you, the accountant, the invoice has a lot of important data:
Payment TermsIn some industries, credit terms include a cash discount to encourage early payment of an amount due. A cash discount is a deduction from the invoice price that can be taken only if the invoice is paid within a specified time. Sellers call a cash discount a sales discount and buyers call it a purchase discount. In the case above, the terms 2/10, net 30 means a buyer who pays within 10 days following the invoice date may deduct a discount of 2% of the invoice price. The term 2/10 looks like a fraction, but it’s not. It’s just shorthand. If payment is not made within the discount period, the entire invoice price is due 30 days from the invoice date (net 30 or n 30). The invoice was dated December 19, so the clock started ticking on the 20th and the 2% discount window closed at the end of business on the 29th (10 days). You could just subtract 19 from 31 to get that date. If the invoice had been dated December 27, the 10-day window would have closed on January 6. (See if you can duplicate that math.) Companies base discounts on the invoice price of goods. If merchandise is later returned, the returned amount must be deducted from the invoice price before calculating discounts. For example, if the invoice price of goods purchased was $20,000 and the company returned $2,000 of the goods, then the seller calculates the 2% discount on $18,000 ($20,000 original − $2,000 return). Notice the discount does not apply to shipping charges. To understand why, we need to understand how shipping charges are assessed, so we look at the shipping terms. Shipping TermsShipping terms are used to show who is responsible for paying for shipping and when the title of the goods passes from seller to buyer. FOB shipping point means “free on board at shipping point.” This is an old-fashioned term that means the seller is free of ownership once the shipping agent takes possession of the goods on behalf of the buyer. In the example above, UPS is an agent of Geyer. When the crew at Bryan Wholesale, Co. put the merchandise into big boxes, it still belonged to Bryan. But, when the UPS driver put the boxes into the truck and shut the door, the XPS-101s became the property of the buyer, Geyer. At that point, Bryan recognized a sale, and, theoretically, Geyer recognized a purchase; however, you, in the accounting department at Geyer, won’t actually record the purchase until the invoice arrives and the goods are accounted for. Usually, since the buyer takes legal title at the shipping point, the buyer incurs all transportation costs after the merchandise has been loaded on a railroad car or truck at the point of shipment. Thus, the buyer is responsible for ultimately paying the freight charges. UPS and other shippers, however, are usually reluctant to ship items across the country without being paid upfront, so the seller pays the shipper in advance, fronting the money from the buyer. That’s why shipping gets added to the invoice. It’s not part of the sale price—it’s reimbursement to the seller for shipping costs paid on behalf of the buyer. UPS would rather have the seller on the hook to collect the shipping than to get goods to the buyer and have the buyer refuse to pay. FOB destination means “free on board at destination.” That means the seller holds legal title to the goods until they reach their destination. This isn’t as common as FOB shipping point. Usually, under this scenario, the seller is ultimately responsible for paying the freight charges because the seller still owns the goods all the way to the receiving dock. All of these concepts are important to know as we calculate the costs of inventory, which we will do in the next section. But first, check your understanding of the definition of inventory. How does the accounting for merchandising companies differ from service companies?A merchandising company lists on its income statement the account “cost of goods sold,” while service companies do not list this account (Kimmel, Kieso, & Weygandt, 2011). Service based companies do not carry inventory and therefore don't use this “cost of goods sold” account.
What is the difference between service company and merchandise company?Service companies provide intangible services for their customers. Merchandising companies are middlemen that sell goods to customers, which they purchase from their suppliers.
Is the accounting cycle of a service business different from that of a merchandising entity?Although service companies and merchandising companies offer vastly different goods to its customers, both are required to adhere to accounting principles. This means that the accounting equation Assets = Liabilities + Owner's Equity applies to both.
What accounting activities make a merchandising business differ from a service business Brainly?The main difference between a merchandising company and a service industry company is that the merchandising company must stock inventory. This becomes important when setting up the accounting for the business.
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