Which accounts are used in merchandising business but not in a service firm?

Any business that provides a service or sells products has an accounting cycle. Accounting is how a business tracks its finances. 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.

However, the types of goods and services provided dictates how the business accounts for its operating expenses and income.

Defining the Two Companies

A service company is a business that provides services to consumers or other companies. For example, an accounting firm provides accounting services to individuals or other businesses, while a hair salon offers haircuts, styling and other hair care services to its customers. A merchandising company buys inventory in bulk and then deliver these products to its customers, usually other businesses. A clothing boutique might buy its jewelry and accessories from a merchandiser who specializes in clothing accessories.

Although a service company might have some inventory (the salon sells shampoo and other hair care products for instance), for the most part, a merchandise company always have stock since they're in the business of selling goods to others.

The Accounting Cycle

Both types of companies have the same accounting cycle. Transactions are posted in the general journal, and then the amounts are posted to the relevant general ledger accounts. At the end of the accounting cycle, whether it is monthly, quarterly or annually, accounts in the general ledger that require adjusting are adjusted and the financial statements are prepared. Once the accounts are closed out for the period, they are reopened with the adjusted amounts and the new accounting period begins.

Both Have Assets

Service companies and merchandising companies have assets. Cash, Accounts Receivables, office equipment, office supplies and accumulated depreciation, all have a place on both types of companies' chart of accounts. As with any other business, other assets might vary.

For example, a service business might own its building, and therefore, the building is an asset. Or, a merchandising company might not own the building but could own the equipment used to package and ship merchandise to customers.

Both Have Liabilities

Both companies have liabilities, people and companies to whom they owe money. If the companies buy supplies on credit, then they have accounts payable, whether they happen to be purchase orders that are outstanding or a balance on the company's credit card. If either business has employees and wages that have been earned but have not been paid out, those are also considered a liability. And if there's a mortgage on the building or the equipment, the notes payable is also listed as a liability.

Expenses and Owner's Equity 

This is where a service company and a merchandising company's differences are most apparent. Both have the usual expenses, such as office supplies expense, insurance expense and depreciation expense, to name a few. And both have Revenue, Drawing and Capital accounts for the owners. But because a merchandising company has inventory, it has special expenses related to buying and selling the inventory called Cost of Goods Sold, or CoGS.

This is the accounting for how much the merchandise the company sold cost the company to buy and have on hand. Most service companies don't deal with CoGS, because they don't deal with a physical inventory.

Types of Financial Statements

Both service and merchandising companies produce a Trial Balance for the beginning of the period; an Adjusted Trial Balance at the end of the period after adjustments are made; an Income Statement, Balance Sheet and Statement of Owner's Equity, and an After-Closing Trial Balance, once closing entries are completed. This information is pulled from the general journal and general ledger entries that are posted on a regular basis during the accounting cycle.

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.

   Which account are used in merchandising business but not in the service?

   Merchandising companies will have an asset for inventory, whereas service companies do not. This is listed as a current asset.

   What accounts does a merchandising business use?

   Merchandising accounts often include the accounts of inventory, other supplies, cost of goods sold and supplies expense, and are subject to adjustments and closing.

   What items appear in financial statements of merchandising companies but not in service companies?

   Answer and Explanation: One common item that appear in the financial statements of merchandising companies but do not appear in the statements of service companies is the Inventory account. It is an account in the balance sheet, classified as current assets.

   What account activities make a merchandising business differ from a service business?

   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.