Question

compare and contrast the closing procedures for a service based business and the closing procedures for a merchandising company

Answer 1

Solution:-

Compare and contrast the closing procedures for a service based business and the closing procedures for a merchandising company:-

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.

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

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