Question

How is the accounting cycle different for a merchandising operation, as compared to a service business? How do the asset, revenue and expense accounts differ? How does the multi-step income statement differ from a single step? Which format is better? Be sure to support your answer.

Answer 1

1) Accounting cycle differ for Merchandising and service operations:

Merchandising operations:-

Here it buys from one or more suppliers to resale to retailers or wholesalers.

Here Net income=Sales (-)Cost of goods sold (-) Operating expenses.

The accounting cycle starts immediately when the transaction is completed, hence no delay to prepare it's financial statements for Merchandising operations.

Service business:-

Here these businesses provide services to customers for one time payment basis or continuing payment basis.

Here Net income=Sales (-) Operating expenses.

The accounting cycle starts only when the customer pay for the service. It may take time to pay.

Hence there will be delay in the preparation of financial statements.

2) Asset, revenue, expense account differ:

Asset: It is a resource which is owned by the company.

These will be entered in financial statements under Balance sheet.

It may be either Tangible or Intangible.

Assets can be classified based on life span of assets or liquidity form.

Assets=Liabilities+owners equity.

Revenue: It means earning money by sale or produts or by providing service.

Here Net Income=Revenue (-) Expenses.

Revenue may be recognized in 2 methods i.e., accrual system or cash system.

In accrual system Revenue recognized as and when the transaction had completed irrespective of payment paid.

In cash system Revenue recognized only when the payment is received.

Expenses: These are the one which allow the company to operate. Company spends these expenses to produce products or for providing services.

The expenses may be in Fixed or Variable form.

For accrual system expense recorded when it incurred by company.

Whereas for cash system expense recorded only when it is paid.

3) Multi step income statement differ from single step:

Income statement is the summary of companies operations over a period of time.

Based in the size of company type of income statement differs.

Small companies adopt single step income statement.

In single step statement net income will be shown directly.

I'm single step statement net income= Incomes/Gains(-) Expenses/Loses.

Where as in multi statement net income will get in 2 steps which is complicated and it is used by big companies.

Gross Profit=Sales (-) Cost of goods sold.

Operating Profit=Gross Profit (-)Operating expenses.

For companies Multi statement format is better because detailed explanation is necessary for these firms

Whereas for sole proprietor or partnership forms single step statement is better.