Why do you think the income statement for merchandising business includes new account title
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The multi-step income statement is used to report revenue and expense activities for a merchandising business. It is an expanded, more detailed version of the single-step income statement. The most significant cost that a merchandise business incurs is the cost of acquiring the inventory that is sold. It is important to match what was paid for an item to what it sells for. The multi-step income statement presents financialinformation so this relationship may easily be
seen. Here is a basic income statement for a merchandising business. Notice that Cost of Merchandise Sold, an expense account, is matched up with net sales at the top of the statement. There are three calculated
amounts on the multi-step income statement for a merchandiser - net sales, gross profit, and net income. Net sales is the actual sales generated by a business. It represents everything that “went out the door” in sales minus all that came back in returns and in the form of sales
discounts. Gross profit is the same as “markup.” It is the difference between what a company paid for a product and what it sells the product for to its customer. Net income is the business’s profit after all expenses have been deducted from the net sales amount. A more complex manufacturing business may break out its operating expenses into two categories on the income statement: selling expenses and administrative expenses. Selling expenses are related to the people and effortsused to market and promote the product to customers. Administrative expenses relate to the general management of the business and may include costs such as the company president’s office and the human resources and accounting departments. An example is shown below. What are Income Statement Accounts?Income statement accounts are those accounts in the general ledger that are used in a firm’s profit and loss statement. These accounts are usually positioned in the general ledger after the accounts used to compile the balance sheet. A larger organization may have hundreds or even thousands of income statement accounts, in order to track the revenues and expenses associated with its various product lines, departments, and divisions. The income statement accounts most commonly used are as follows:
An organization located in a unique industry may find that it requires additional accounts beyond the ones noted here. Alternatively, they may find that certain accounts are of no use. Thus, the exact set of income statement accounts used will vary by company. Why is it that the income statement of a merchandising business differs to the income statement of a service business?The primary difference between a merchandising and a service-based business is the presence of inventory. Merchandising businesses sell goods to customer, whereas service-based businesses do not. The companies' financial statements, including the income statements, must reflect this difference.
What items are included on an income statement of a merchandising business?Here is a basic income statement for a merchandising business. Notice that Cost of Merchandise Sold, an expense account, is matched up with net sales at the top of the statement. There are three calculated amounts on the multi-step income statement for a merchandiser - net sales, gross profit, and net income.
What are the account titles under merchandising business?However, the Merchandising worksheet will include the following account titles and amount: accounts receivable, merchandise inventory, accounts payable, sales tax and purchases.
What is the importance of an income statement account in one's business?Importance of an income statement
An income statement helps business owners decide whether they can generate profit by increasing revenues, by decreasing costs, or both. It also shows the effectiveness of the strategies that the business set at the beginning of a financial period.
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