Thursday, December 16, 2010

What distinguishes a merchandise business from a service business?

What distinguishes a merchandise business from a service business?

Objectives
Be acquainted with the differentiation between merchandise business and service business
How merchandise business differs from service business?

Service business:
*      Involves providing services to costumers
*      Revenues are reported as revenue or fee earned
*      Operating income = Revenues – Operating expenses (Warren, p.126)
*        Income before taxes   =      Operate income (+)(-) Other income/expense
*       Net income = Income before taxes – Income taxes
               (Warren,p.126)
Merchandise business:
*      Involves the buying and selling of merchandises
*      Revenues from sold merchandises less returns or discounts are reported as Net sales
*      Gross profit = Net sale – Cost of merchandise sold  (Warren, p.127)
How merchandise business  & service business differ?
*      The way they operate
*      Balance sheets elements (merchandise inventory)
*      The way they prepare Income statements                        

References
*      Warren, S. C.( 2009).Survey of accounting.
   4th ed. Ohio: South-Western Cengage learning

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