Is Your Company a Service or Merchandising Business?

How Do you Prepare your Financial Statements?

The activities of a service business differ from those of a merchandising business.  The differences are illustrated similar to below.

The revenue activities of a service business involve providing services to customers.  On the income statement for a service business, the revenues from services are reported as fees earned.  The operating expenses incurred in providing the services are subtracted from the fees earned to arrive at net income.

​In contrast, the revenue activities of a merchandising business involve the buying and selling of merchandise.  A merchandising business first purchases merchandise to sell to its customers.  When this merchandise is sold, the revenue is reported as sales, and its cost is recognized as expense.  This expenses is called the cost of merchandise sold.

Source:  Corporate Financial Accounting 12E