Question

What is the different step in the accounting cycle for a merchandising company instead of a service company?

Answer 1

The main difference in the accounting cycle between a merchandising company and a service company is how they handle inventory and COGS. Merchandising companies must account for the purchase and sale of inventory, calculating a merchandise balance and incorporating it into their gross profit calculations. Service companies do not have these steps due to the absence of inventory.

Step-by-step explanation:

The accounting cycle for a merchandising company differs from that of a service company mainly due to the inclusion of inventory and cost of goods sold (COGS). While both types of companies will go through similar fundamental accounting steps, such as recording transactions, posting to the ledger, and preparing financial statements, the key difference lies in how they handle inventory. Merchandising companies buy and sell goods, and therefore they must account for the purchase and sale of inventory within their accounting cycle.

Steps in the Accounting Cycle for Merchandising Companies

For merchandising companies, the accounting cycle includes additional steps such as:

1. Determining the cost of goods purchased.
2. Recording the cost of inventory sold as COGS.
3. Adjusting inventory accounts at the end of the period to reflect unsold inventory.

These steps are necessary to accurately calculate the merchandise balance and the impact on gross profit. Service companies, on the other hand, do not have inventory and therefore omit these steps. Instead, service companies focus on the revenue from services provided and direct expenses related to providing these services.

Calculating the Merchandise Balance and Current Account Balance

To calculate the merchandise balance, a company would use the following steps:

1. Record all sales (exports) and purchases (imports) of goods.
2. Subtract income payments flowing out of the country (under Imports) from the money coming back to the United States (under Exports) and enter this amount under the Balance column.
3. Note any unilateral transfers as a negative amount under the Balance column.
4. The merchandise trade balance is identified as the difference between exports of goods and imports of goods, which is listed under the Balance column.

The current account balance includes not only the merchandise trade balance but also services, income receipts, and unilateral transfers. It provides a broader view of a country's international economic position.