Business

Differences in Accounting for Service, Trading, and Manufacturing Companies

What are the differences between service, trading, and manufacturing companies and the accounting processes carried out? In the business world, we will recognize three different types of businesses that affect the accounting form of financial records.

The three types of businesses that affect accounting records are trading companies, manufacturing companies, and service companies. We will discuss the differences in these companies’ accounting from several aspects.

The next question arises: what makes the form of accounting and financial records of the three types of businesses different? The answer, of course, is the difference in the business structure and systems that apply to every kind of business.

Introduction to Trading, Service, and Manufacturing Companies

Accounting practices in each type of company are different to accommodate all financial management carried out by the business. To find out in full, let’s listen to the explanation of the differences between trading, manufacturing, and service companies below.

  • Trading companies obtain inventory products from suppliers as finished materials for resale and take the difference in sales as business profits.
  • Manufacturing companies obtain products made from raw materials into raw materials or finished materials to be processed in such a way as to become products with a higher selling value than natural materials.

Therefore, its financial calculations will be much more complicated than a trading company. Service companies need an inventory of goods to market. But their products are intangible, like trading or manufacturing companies. Their products are seen as the results of their services, so accounting records will only be seen in the inventory and purchases section.

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Differences in Accounting for Trading, Service, and Manufacturing Companies

We can summarize the differences in accounting for trading, service, and manufacturing companies as follows:

Trade Manufacture Service
Supplies Trade goods Inventory of raw materials, production process, auxiliary materials, finished goods No inventory
Purchase Available Available Incorporated in equipment/equipment
Cost of goods Available Available None
Accounting Cost None Available None

The differences in accounting for service, trading, and manufacturing companies are from inventory, purchasing, pricing, and cost accounting.

In service companies, selling and producing services occurs when there is an agreement between the company and the customer.

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Therefore, from an accounting point of view, there are only two primary transactions in service companies, namely administrative transactions and sales of services.

In general, the stages of the accounting cycle of service, manufacturing, and trading companies are as follows:

1. Recordkeeping

Financial recordkeeping refers to creating and maintaining records of financial transactions and other financial information. It is an essential part of any business or organization, as it helps to track income, expenses, assets, liabilities, and other financial matters.

Many different types of financial records may be kept, including:

  1. Ledgers: These are records that detail the financial transactions of a business or organization. They may include accounts for income, expenses, assets, liabilities, and equity.
  2. Invoices are documents that detail the goods or services provided by a business to a customer, along with the price and terms of payment.
  3. Receipts: These documents provide proof of payment for goods or services.
  4. Bank statements: These are documents that detail the financial transactions of a business or organization through a bank account.
  5. Tax records: These are used to prepare and file tax returns.

It is important to keep financial records accurate, complete, and up-to-date, as they can be used to track the financial performance of a business or organization and to make informed decisions. They can also be used to meet legal and regulatory requirements, such as tax reporting.

There are various methods for keeping financial records, including paper, electronic, and a combination of both. It is essential to choose a way that is efficient, secure, and meets the needs of the business or organization.

2. Summarizing

This stage is carried out after the recording stage has been completed. A summary is made of the effect of all financial transactions that occurred during the period in question. The summary is seen in the final balance of each ledger posting account. Furthermore, the balance of each performance is recorded in a separate document called a trial balance.

Accounting activities carried out at the summarizing stage include:

  • Preparation of a trial balance
  • Making an adjustment journal
  • Preparation of working paper (balance sheet)
  • The practice of a closing journal
  • Balance sheet after closing

3. Preparation of Financial Report

These stages include the balance sheet, income statement, statement of changes in capital, and cash flow statement. Then a case arises that sometimes needs clarification. For example, what about a facial service company or salon that also sells beauty products?

That’s easy; you just need to incorporate what is part of the trading company into the service company.

Combine the costs incurred and calculate the cost of goods sold. And for the results of facial treatment services, of course, it must have a separate post so that in the business, there are two incomes, namely the proceeds from the sale of goods and the income from treatment services.

Conclusions

From the explanation above, we will understand that there are a few accounting differences between service, manufacturing, and trading companies related to their business processes.

That explains the differences between trading, service, and manufacturing companies in the accounting process.

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