Accounting Cycle for Service Companies vs. Merchandising Companies

The process of recording and processing a company's financial transactions is known as the accounting cycle. The accounting cycle outlines a step-by-step process that ensures the accuracy and uniformity of financial statements. The process begins when a transaction takes place and ends with its inclusion in the company's financial statements. While all types of companies apply the accounting cycle process in recording their transactions, the details of those transactions can differ between a service-oriented business and a merchandising company.

As the name implies, service companies provide specific services to their customers. These services can range from professional consulting, such as from doctors and attorneys, to household chores, such as carpet cleaning and child care. Service companies can provide these services as a one-time offer or on a continuing basis. They can also choose to bill the customer by the service provided, by the hour or by a billing scheme of their own.

A service company determines its net income by subtracting its operating expenses from its revenues. The accounting cycle for service companies starts when the customer pays for the service. However, service companies can often expect to wait several weeks or months between the time they invoice the customer and the time they receive payment. The unpaid balance on these invoices represent "accounts receivable," which has the potential to become revenue but does not count toward the accounting cycle.

A merchandising company buys items to stock its shelves from one or more suppliers to resell to customers. These customers can either be retail buyers or wholesalers. Merchandising companies must record transactions on both the purchases and sales of their inventory items. The accurate recording of inventory transactions determines whether or not the merchandising company has made a profit, so the steps in the accounting cycle process act as a guide to calculating the company's profits.

A merchandising company determines its net income by subtracting both its operating expenses and its costs of goods sold from its revenue. While service companies can wait for months to see the revenues from their transactions, most merchandising companies realize their revenues immediately during the transaction. The transactions begin when customers pay for their items and the merchandising company delivers those items. This process enables merchandising companies to record transactions and start the accounting cycle without delay.