Understanding the distinction between merchandising and manufacturing companies is essential for grasping how different business models operate. A merchandising company primarily focuses on reselling goods that have already been produced by other manufacturers. This type of company maintains a single inventory account, commonly referred to as "inventory" or "merchandise inventory." The primary function of a merchandising company is to purchase finished products, such as t-shirts, and sell them directly to consumers or other businesses.
For instance, when a merchandising company like XYZ purchases goods worth $10,000 on account, it records this transaction by debiting the inventory account to reflect the increase in inventory. The corresponding credit is made to accounts payable, indicating that the company owes this amount to the supplier. This transaction can be summarized in the accounting equation, where both inventory and accounts payable increase by the same amount, ensuring that the equation remains balanced:
Inventory (debit) = Accounts Payable (credit)
In contrast, a manufacturing company engages in the production of goods. This type of company not only sells finished products but also incurs costs related to raw materials, labor, and overhead to create those products. Manufacturing companies typically have multiple inventory accounts, including raw materials, work-in-progress, and finished goods, reflecting the various stages of production.
In summary, while merchandising companies focus on buying and reselling finished products, manufacturing companies are involved in the entire production process, from sourcing raw materials to selling the final product. This fundamental difference influences their accounting practices, inventory management, and overall business strategies.