Question

"The steps in the accounting cycle for a merchandising company are the same as the steps in the accounting cycle for a service company." Do you agree or disagree?

What are the special journals that merchandising companies use? Explain some advantages of using Special Journals..

Answer 1

No, the steps in the accounting cycle for a merchandising company and the steps of accounting cycle for a service company are not same. Thus, I disagree with the statement.

There are number of differences between the accounting cycles of a merchandise and service company. The major differences are in recognition of revenue and formats which are used by the two different companies to present their financial statements. In case of Service Company the recognition of revenue is when the services are provided and the collection of revenue is more or less certain and there exist no uncertainty in respect of revenue. However, in case of Merchandise Company the revenue is recognized at the date of sale.

The special journals in respect of Merchandise Company is the subtraction of cost of merchandising from the revenue to indicate the amount of gross profit whereas no such journal entry is passed by a service company.