Question

Describe how activities of a service and a merchandising business differ

Describe the differences between the income statements of a service and a merchandising business

What is the meaning of (a) 1/15, n/60; (b) n/30; (c) n/eom?

Answer 1

1) The activities of a service business generate revenue mainly from rendering of service. For example: Consulting revenue, Advertising revenue, etc. The activities of merchandising mainly involve purchase and resale of merchandises.

2) Service business does not involve any production and hence there are no inventories in the business. There is no cost of goods sold for a service company. Service business income statement does not show gross profit. The expenses incurred in rendering services are deducted from service revenue.

Merchandising business involves purchase of merchandise inventory and it has inventory in its books. The cost of goods sold is computed by taking into account opening stock, purchase during the period and deducting closing stock during the period. The difference between sales and cost of goods sold is gross profit and difference between gross profit and operating expenses is operating income.

a) 1/15 ,n/60- If payment is made within 15 days 1% discount is given else the payment should be made in 60 days from date of sale

b) n/30 – Payment should be made in 30 days from date of sale

c) net /eom – payment should be made by end of the month