Question

Name three accounts that would normally appear in the chart of accounts of a merchandising business but would not appear in the chart of accounts of a service business. What type of accounts are these and when are they used?

Answer 1

The merchandising business is generally engaged in buying and selling tangible goods, whereas service business deals in providing services to customers (for example, accountants, doctors). Both types of businesses follow Generally Accepted Accounting Principles (GAAP), but the nature of business is different.

The three accounts which appear in chart of accounts of a merchandising business but not on a service business are-

1) COST OF GOODS SOLD ACCOUNT

The cost of goods sold is an expense account; it describes the cost of purchasing the inventory and sale to customers. The service business does not deal with an inventory.

2) SALES ACCOUNT

The business sells there tangible goods to customers; the sales which are generated from selling the products would appear in the sales account. In the case of service business, revenue is generated by providing services to the customers, so instead of a sales account, there is a revenue account.

3) INVENTORY ACCOUNT

Inventory is an asset to the company. Assets create value for the company, so it is essential to value inventory at a correct price, service business does not have an inventory account because it does not deal in goods.