Question

What is the difference between a service business and a merchandising business? As you answer the question, you may want to look at the difference in accounts used as well as the differences between product costs and selling and administrative costs.

Answer 1

Key Takeaways. A merchandising company engages in the purchase and resale of tangible goods. Service companies primarily sell services rather than tangible goods. Income statements for each type of firm vary in several ways, such as the types of gains and losses experienced, cost of goods sold, and net revenue.

KEY TAKEAWAYS

A merchandising company engages in the purchase and resale of tangible goods.

Service companies primarily sell services rather than tangible goods.

Income statements for each type of firm vary in several ways, such as the types of gains and losses experienced, cost of goods sold, and net revenue.

Merchandising Company

A merchandising company buys tangible goods and resells them to consumers. These businesses incur costs, such as labor and materials, to present and sell products. Retail and wholesale companies are the two types of merchandising companies. Retail companies sell products directly to consumers, and wholesale companies sell products directly to retailers or other wholesalers. The operating cycle of a merchandising company is the time between the purchase of the product and the sale of that product.

Service Company

Service companies do not sell tangible goods to produce income; rather, they provide services to customers or clients according to a specific expertise or specialty. Service companies sell their services, often charging base fees and hourly rates. Examples of service companies include consultants, accountants, financial planners, and insurance providers.

Key Differences in the Income Statements

The income statement shows financial performance from operations first and then separately discloses gains and losses that fall outside the regular scope of operations.

The differences in income statements can be further understood by examining the balance sheets of both types of companies. For instance, inventory is a large percentage of the asset's category for a merchandising company. As such, they tend to have less cash on hand than service businesses since their capital is tied up in illiquid assets. By contrast, service businesses' assets tend to be weighted toward accounts receivable. For a service business, the absence of inventory means receivables is a greater proportion of total assets

cost of services are referred to all the direct costs associated with services rendered to the customer for the business provides companies. It includes all the direct costs involved in running or performing services

Expenses for a merchandising company must be broken down into product costs (cost of goods sold) and period costs (selling and administrative). Just like all income statements, the first line is revenue. In the case of a business that sells a product, we refer to revenue as Sales or Sales Revenue..