The business activity of a Service Company is a bit different than that of a Merchandising company. Before we can compare the differences, let's understand what a Merchandising company is. According to the textbook, a Merchandising company is one that buys and resells goods for a profit. Service companies, as the name suggests, earn money by performing a service, for example, mowing a lawn. In a service company, we just focus on revenue and expense to find net income. With a merchandising company, there is a bit more to it. As we mentioned before, a merchandising company buys and resells goods, so the revenue depends on additional factors. Two additional key details we have to look out for are sales and cost of goods. The revenue earned, referred to gross profit, is the net sales minus the cost of goods. The equation for this type of company is: (Net Sales - Cost of Goods Sold) - Expenses = Net Income. Meanwhile, for a service company, it is just Revenue - Expenses = Net Income. To sum it up, in three new accounts we have to use our Net Sales, Cost of Goods Sold and Gross Profit. Another key difference would be the utilization of Inventory. Poor management of a company's Inventory can be very detrimental. That is why companies account for Inventory using one of two inventory systems, perpetual and periodic. The goods have to be stored somewhere and kept track of. First, we have to know how many goods we have at a given time. The way we would get this is by adding Beginning Inventory and Net Purchases. After selling goods, we have to adjust our Inventory. The new Inventory will be recorded as Ending Inventory. Additionally, we would also have to note the sold goods as the Cost of Goods Sold. Another cost we also have to consider would be the transportation of our goods. Whether we are receiving goods from a supplier or shipping products out to a customer, we have to pay for the transportation. This account is referred to as a Delivery Expense. Merchandise is typically sold at a much higher volume compared to services. This can make it prone to errors. We also have to take note of defective and/or returned goods. This is referred to as Purchase Discounts and Allowances.

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