Hi there! Welcome to the
fourth lesson of The Accounting Buddy. This lesson is just a continuation of
our previous topic about the types of business. In our previous lesson, we have discussed the types of business as
to organizations namely sole
proprietorship, partnership and corporation. This time, we will focus on
the types of business as to
activity.
The following are the types
of business as to activity:
- Servicing
- Merchandising
- Manufacturing
SERVICING
The first type of
business is the Service Type. These are the businesses
engaged in rendering their services for a fee. By merely looking at the
financial statements of a particular firm, you can identify if it is a service
type of business. Usually, it uses the account title Service Revenue. Other alternatives are Professional Fees and Service
Income.
Examples of service types
of business are laundry shop,
schools, massage parlor, barbershop and hospitals.
When it comes to degree of
conversion, this type has a moderate to high degree of conversion. For example,
if you are rendering your cooking skills, it is not enough to buy the
ingredients. You have to slice, to mince, to chop, to boil, to cook and to serve
them before you can bill your professional fee.
MERCHANDISING
Next
is the Merchandising type. This sells finished goods and items at higher
profits. If the service type uses Service
Revenue, merchandising uses Sales account.
Other account titles usually used are Merchandise
Inventory, Sales Discount, Purchases, Purchases Returns and Allowances and
Sales Returns and Allowances. We will further discuss each of them as we go
on the process of a Merchandising type business.
Examples
of merchandising firms are groceries, sari-sari
store and other buy and sell firms. Because of its simple way of generating
profit, merchandising has a low degree of conversion.
MANUFACTURING
Manufacturing
engages in the whole process of making the product. It starts from the
purchasing of raw materials up to the finishing part of the process.
Manufacturing type can either choose whether they shall use a periodic inventory system or perpetual inventory system.
As
for its accounting, it also uses the account title Sales.
Sometimes,
when a manufacturing business start assembling a product, it is not guaranteed
that it can be finished before the preparation of financial statements that is
why accounts are segregated as Raw
Materials Inventory, Work-in Process Inventory, and Finished Goods Inventory. This
shall be further discussed on our Cost Accounting lessons.
Examples
of manufacturing types of business are
car, computer, and other gadgets assembly.
SPECIAL NOTES
We have mentioned before
that in a service type of business, you can either use the account titles Professional Fees or Service Revenue. You might ask which one
you shall use. Actually, this depends on the company where you work. There must
be consistency so use the account titles on the previous financial statements.
For classroom purposes,
clarify this matter to your professor. Some professors do not consider an
answer correct if the student does not follow the account title he assigned.
Well, that is very reasonable because in real world, you have to follow what
the management has assigned.
PHOTO REFERENCES
http://oasismassagekaty.com/
http://en.wikipedia.org/wiki/7-Eleven
http://www.slideshare.net/Sukthankar2312/evolution-of-a-productcar
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