Question

In: Accounting

Compare and contrast accounting for a service-based business versus a merchandising business. What are some of...

Compare and contrast accounting for a service-based business versus a merchandising business. What are some of the accounts that are unique to the latter type of business? What is the difference between gross and net profit?

Please provide one main post and two additional peer interactions. Your main post must be a minimum of 200 words

Solutions

Expert Solution

A merchandising business is one which sells merchandise to its customers. It would include retail stores, fashion outlets etc. which buy their goods from suppliers and retail them to the customers.

On the other hand, servicing business doesn't provide any tangible products to its customers they provide their services to the customers. Some examples of such businesses are web developers, painters, plumbers etc.

Differences in Accounting

The biggest major difference that you will notice with their accounting is merchandise business deals with inventory (stock of goods) which will not be present there in the servicing business. Another difference that might be present there will be the length of the operating cycle of both the businesses. Operating cycle of the merchandising business will be much longer than servicing business attributed to the holding period of inventory.

Some accounts which are unique to the Merchandising Industry

  • Inventory Account
  • Freight / Carriage Expense Account
  • Wholesaler's Account Payable
  • Purchases Account
  • Sales Account
  • Closing Stock / Opening Stock
  • Goods sold on consignment Account

Difference between gross profit and net profit

In simple words, Gross profit means sales revenue minus the cost of goods sold (Opening Stock + Purchases + Direct Expenses - Closing Stock)

Whereas, Net profit includes everything that gross profit includes but after that it also reduces it by all other indirect expenses such as rent, electricity, travel etc.

Gross profit shows how well the business is performing in its core business / gross terms. How much of the revenue exceeds the cost of goods sold. Whereas, net profit shows net takeaway from the business after cutting all the expenses.


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