Question

How is the accounting cycle different for a merchandising operation, as compared to a service business? How do the asset, revenue and expense accounts differ? How does the multi-step income statement differ from a single step? Which format is better? Be sure to support your answer.

Answer 1

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.

Both may hire employees; both may need equipment to be in business; both types of business structures have customers who pay for goods or services. The main difference between a merchandising company and a service industry company is that the merchandising company must stock inventory.

In case of merchandise business , closing inventory is maintained and is shown in current assets of the balance sheet. In the income statement , opening inventory is maintained at the debit side of income statement & closing inventory is maintained at credit side of income statement. However in case of merchandise no such inventory is maintained.

Revenue & expense account differ with kind of business it is .(For ex: in a service industry revenue is booked when service is provided & in merchandise industry revenue is booked when goods are sold .)

A single-step income statement gives a simple accounting of a business's net income, whereas a multi-step income statement follows a three-step process to calculate net income, separating operational from non-operational revenues and expenses.

The multi-step income statement uses three different accounting formulas to arrive at the net income:

1. GROSS PROFIT = NET SALES – COST OF GOODS SOLD

Cost of goods sold is subtracted from net sales. This gives the gross profit.

2. OPERATING INCOME = GROSS PROFIT – OPERATING EXPENSES

Operating expenses are subtracted from gross profit. This gives you the operating income.

3. NET INCOME = OPERATING INCOME + NON-OPERATING ITEMS

Operating income is added to the net non-operating revenues, gains, expenses and losses. This final figure gives the net income or net loss of the business for the reporting period.

A single-step income statement presents the revenue, expenses and ultimately the profit or loss generated by a business, but it reports on this information by using just one equation to calculate profits. The equation used in a single-step income statement is:

Net Income = (Revenues + Gains) – (Expenses + Losses)

The format you choose depends on the type of business you own and the ultimate purpose of the income statement you’re creating. Both single-step and multi-step income statements report on the revenues, expenses and the profit or loss of a business during a specific reporting period.