How would an accounting system change or accounts be added or financial statement change if I provide services and merchandise?I want to provide both services and merchandise to my customers. How...
How would an accounting system change or accounts be added or financial statement change if I provide services and merchandise?
I want to provide both services and merchandise to my customers.
How would it change the accounting system for the business? What additional accounts would be needed? How would the financial statements change?
Develop a list of advantages and disadvantages of providing both services and merchandise to customers.
Many companies provide both products and service for their products. It's not difficult to modify the accounting system as the basic principles of accounting still exist-everything has to balance and be accounted for.
There are additional accounts that must be added to the books: Revenue, Expenses, Purchases, and Inventory. There might even be Payroll accounts associated with only the Services Department. Revenue accounts can go by several different names, but are listed in the Revenue Section of the General Ledger and have a natural credit balance. Any expenses generated from the services rendered must also have an account and are listed in the Expenses Section of the General ledger and have a natural debit balance. All revenue and expense accounts get closed out with adjusting entries at the end of each month, and a Profit & Loss Statement (or Income Statement) is generated to show either Net Gain or Loss.
Any inventory needed to provide the services is purchased and kept in stock and must be adjusted constantly to reflect its fluctuating balance. It is a Current Asset and is listed as such in the company's books. Any purchases of inventory made are entered into an account called Purchases and find their way into the Cost of Good Sold on the company's income statement.
A company can even have separate books for their Products and Service branches with accompanying financial statements. This would ensure that the company can keep their finger on each form of revenue and if it's making a profit for the company.
Carrying both products and services has the advantage of providing the customer with an all inclusive package for caring for their products. Many manufacturers have warranty coverage for their products, and your company can be the go-between (a liaison, so to speak), or middleman in handling manufacturer/consumer transactions. With a manufacturer's backing, service can be a very lucrative business!
Providing service is not without its headaches, however and has several disadvantages! One disadvantage of service is the incredible work load that's sometimes generated for your company. And, sometimes parts are hard to get from the manufacturer or have such a long lead time that the customer gets frustrated and takes their business elsewhere. Sometimes the manufacturer makes promises that they can't keep and your company is left holding the bag. Sometimes the expenses are so high to maintain personnel, inventory, and adequate space for repairs that it eats up any profits made.
A company would be wise to research other businesses engaged in similar product/services ventures and weigh their options before committing their time and resources to something that could ultimately break them.