What are the two expenses classified in the income statement of a merchandising business?

The statement of owner's equity and the statement of cash flows are the same for merchandising and service companies. Except for the inventory account, the balance sheet is also the same. But a merchandising company's income statement includes categories that service enterprises do not use. A single‐step income statement for a merchandising company lists net sales under revenues and the cost of goods sold under expenses.

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What are the two categories of expenses in a merchandising business?
What 2 classifications appear on the income statement?
What 2 types of expenses are there?
What items are included on an income statement of a merchandising business?

Music World Income Statement For the Year Ended June 30,20X3

| Revenues | |
| Net Sales | | $1,172,000
| Interest Income | | 7,500
| Gain on Sale of Equipment | | 1,500
| Total Revenues | | 1,181,000
| Expenses | |
| Cost of Goods Sold | $596,600 |
| Selling Expenses | 177,000 |
| General and Administrative Expenses | 152,900 |
| Interest Expense | 18,000 |
| Total Expenses | | 944,500
| Net Income | | $ 236.500

Although the single‐step format is easier to read than the multiple‐step format, most companies produce a multiple‐step income statement, which clearly identifies each step in the calculation of net income or net loss.

If you recall, we are examining the changes in the accounting cycle between a service business, and a .

The areas that have variation are highlighted in colour below. In this lesson we’ll discuss the changes to the financial statements.

2. Changes to the Balance Sheet.

Besides the line for the Account as shown below (in ), there are no changes to the Balance Sheet.

3. Why are we changing the Income Statement?

It is now time to change the Income Statement. Previously, we used a two column Income Statement like the one below.

Our needs however, have surpassed this simple format. Similar to the reasons for changing the Balance Sheet, there are three major reasons for changing the Income Statement:

We have several that need to be shown and sub-totalled on the Income Statement. This requires a Balance Sheet with multiple columns.
As we begin to require more specific information for analysis and reporting, we need to categorize, and classify certain accounts into particular groups, so as to clearly present important information.
Lastly, now that we are working with businesses that sell goods, we have the addition of a new type of expense: the expense. This requires a new section on the Income Statement.

In this lesson, we shall learn how to make a formally presented Income Statement for a .

4. How do we make the new Income Statement?

There are three really big changes:

1. Accounts are classified more specifically
2. There are three columns
3. There is a new section for the Cost of Goods Sold

We now will discuss each of these in turn.

A. Accounts are classified more specifically

Instead of the two parts on our Income Statement as show above (Revenues and Expenses), we now have four. Mainly this is to track and present separate types of costs.

Below you can see what each of these sections is, and why they exist:

As you can see, we have a section for

1. Revenues,
2. Product Costs (i.e. inventory sold, or Cost of Goods Sold)
3. Period Costs (for regular costs from running our business – in other words – operating expenses), and
4. Non-Operating Revenues and Costs that are not routine or operational in nature.

Non-Operating Items

This is the newest concept. These non-operating expenses are for items that do not occur regularly, and therefore are shown separately so as not to skew expense levels for the operating expense section.

When a reader looks at operating expenses on an Income Statement, the section should reflect costs that are normal and recurring in nature (i.e. the reader would expect to see them again next year).

Non-operating revenues and expenses are either:

Non-recurring (a loss or gain from the sale of an asset),
Exceptional (acts of God),
Beyond the control of management (like taxes), or
Not operational in nature (like interest – interest is a financing/borrowing decision, subject to interest rates, which are also beyond the control of management).

Therefore, these costs are separated out from regular .

B. There are three columns

Just like the new , the new Income Statement has three columns, with very similar purposes as shown below:

C. There is a new section for the Cost of Goods Sold

This is the most difficult section of the four-part Income Statement. Let’s go through it step by step. When you are ready, click ‘Next’ below to begin.

5. What the new Income Statement Tells You

This new Income Statement is useful for a variety of reasons, just the like the new . When you’re ready, click ‘Next’ below to see why.

Practice Exercise

Using the worksheet and blank template found in the Excel file below, produce a formal Income Statement.

Exercise

NOTE: If you prefer, you can do it by hand. You can print out your own accounting paper at any time by using this file:

What are the two categories of expenses in a merchandising business?

There are two categories of expense, cost of goods sold and operating expenses. The cost of goods sold includes the cost used in buying the merchandise that was sold. Operating expenses include selling and administrative expenses.

What 2 classifications appear on the income statement?

Two income-statement-based indicators of profitability are net profit margin and gross profit margin.

What 2 types of expenses are there?

Expenses can be categorized in a variety of ways. Expenses can be defined as fixed expenses, such as rent or mortgage; those that do not change with the change in production. Expenses can also be defined as variable expenses; those that change with the change in production.