So far you have studied the accounting cycle for a service business — a company like a law office or a hair salon that sells its time and expertise. Real economies run on more than services, though. Grocery stores, clothing retailers, and hardware stores buy goods from suppliers and resell them to customers. Because these businesses physically hold and move inventory, they need extra accounts and extra steps that a pure service business never touches. This unit builds those accounts on top of everything you already know about debits, credits, and the accounting cycle.
| Type | What it sells | Example | Distinctive account |
|---|---|---|---|
| Service Company | Labour, expertise, or a service — nothing physical changes hands | Accounting firm, dentist, hair salon | Fees Earned / Revenue only — no inventory account |
| Merchandising Company | Merchandise: finished goods bought from someone else and resold as-is | Grocery store, clothing shop, hardware store | Merchandise Inventory, Purchases, Cost of Goods Sold |
| Manufacturing Company | Finished products it builds from raw materials or partly-finished parts | Furniture factory, car plant, bakery | Raw Materials, Work in Process, Finished Goods Inventory |
A Service Company provides work to customers — you are paying for someone's time and skill, and there is nothing to put on a shelf. A Merchandising Company is a company that sells products: it buys finished goods, called merchandise (goods bought for resale), and sells them to customers largely unchanged. A Manufacturing Company makes finished products from raw materials or partially processed products — it is the one creating the merchandise that a retailer will eventually sell. This unit focuses on the merchandiser sitting in the middle of that chain: it buys from a manufacturer or wholesaler and sells to the public.
The operating cycle of a retailer
Every merchandiser repeats the same loop of transactions, called the operating cycle: cash (or credit) is used to buy merchandise, that merchandise is held and advertised, a customer buys it (often on account), the business collects the resulting receivable, and the cash collected funds the next round of purchases. The whole point of the extra accounting machinery in this unit — Purchases, Sales, Merchandise Inventory, Cost of Goods Sold, subsidiary ledgers — exists to track this loop accurately.
- Buy merchandise from a supplier, usually on account (Accounts Payable rises).
- Receive, inspect, and store the goods (Merchandise Inventory rises).
- Advertise and display the goods for sale.
- Sell the goods to a customer, for cash or on account (Sales revenue is earned; if on account, Accounts Receivable rises).
- Collect cash from the customer (Accounts Receivable falls, Cash rises).
- Use the cash to pay suppliers and buy the next round of merchandise — the cycle repeats.