In Unit 1 we introduced the three main types of businesses, merchandising, service and manufacturing. Merchandising companies purchase goods that are ready for sale and then sell them to customers. Merchandising companies include auto dealerships, clothing stores, and supermarkets, all of which earn revenue by selling goods to customers.
In a merchandising sales transaction, the seller sells a product and transfers the legal ownership (title) of the goods to the buyer. A business document called an invoice (a sales invoice for the seller and a purchase invoice for the buyer) becomes the basis for recording the sale.
The following video provides an overview of the difference between Merchandising and Service companies and their respective accounting needs.
An invoice is a document prepared by the seller of merchandise and sent to the buyer. The invoice contains the details of a sale, such as the number of units sold, unit price, total price billed, terms of sale, and manner of shipment.
BRYAN WHOLESALE CO.
Invoice No.: 1258
476 Mason Street
Date: December 19
Detroit, MI 48823
Customer’s Order No.: 218
Sold to:
Baier Company
Shipped To
Baier Company
Address:
2255 Hannon St.
Address:
2255 Hannon Street
Big Rapids, MI 48106
Big Rapids, MI 48106
Date Shipped:
December 19
Terms:
Net 30, FOB Destination
Shipping Terms:
FOB Destination
Shipped by Nagel Trucking Co.
Description
Item Number
Quantity
Price per Unit
Total Amount
True-tone stereo radio
Model No. 5868-24393
200
$100
$20,000
Total
$20,000
Do you see a due date on the invoice? What about who pays for shipping? This is all detailed in the terms. You see two types of terms:
Payment Terms: tells you when an invoice is due and if a discount is offered for early payment
Shipping Terms: tells you who is responsible for paying for shipping and when the title of the goods passes to the buyer
Payment Terms
In some industries, credit terms include a cash discount of 1% to 3% to encourage early payment of an amount due. A cash discount is a deduction from the invoice price that can be taken only if the invoice is paid within a specified time. Sellers call a cash discount a sales discountand buyers call it a purchase discount. Companies often state payment terms as follows:
•1/10, n/30—means a buyer who pays within 10 days following the invoice date may deduct a discount of 1% of the invoice price. If payment is not made within the discount period, the entire invoice price is due 30 days from the invoice date.
•3/EOM, n/60—means a buyer who pays by the end of the month of purchase may deduct a 3% discount from the invoice price. If payment is not made within the discount period, the entire invoice price is due 60 days from the invoice date.
•2/10/EOM, n/60—means a buyer who pays by the 10th of the month following the month of purchase may deduct a 2% discount from the invoice price. If payment is not made within the discount period, the entire invoice price is due 60 days from the invoice date.
•Net 30 —means the entire invoice price is due 30 days from the invoice date without a discount.
Sellers cannot record the sales discount before they receive the payment since they do not know when the buyer will pay the invoice. A cash discount taken by the buyer reduces the cash that the seller actually collects from the sale of the goods, so the seller must indicate this fact in its accounting records.
Companies base discounts on the invoice price of goods. If merchandise is later returned, the returned amount must be deducted from the invoice price before calculating discounts. For example, the invoice price of goods purchased was $ 30,000 and the company returned $ 2,000 of the goods, the seller calculates the 2% discount on $ 28,000 ($30,000 original – $2,000 return).
Shipping Terms
Shipping terms are used to show who is responsible for paying for shipping and when the title of the goods passes from seller to buyer. To understand how to account for transportation costs, you must know the meaning of the following terms:
FOB shipping point means “free on board at shipping point”. The buyer incurs all transportation costs after the merchandise has been loaded on a railroad car or truck at the point of shipment. Thus, the buyer is responsible for ultimately paying the freight charges.
FOB destination means “free on board at destination”. The seller ships the goods to their destination without charge to the buyer. Thus, the seller is ultimately responsible for paying the freight charges.
We will look at how these items factor into journal entries for merchandising companies in the next sections.
Manufacturing companies play an important role in the Indonesian economy. The company contributes to a large income to the country either through taxes or other contracts. Because of its size, the company engaged in manufacturing also has a large absorption of labor, that will lead to reduce unemployment.
Manufacturing itself has a different meaning than production, production itself has a broader meaning, namely the process of processing raw materials into a product such as gas, liquid or solid. While manufacturing is the process of processing raw materials into a product in solid form.
Manufacturing is a term refer to the process of converting raw materials, components, or parts into finished goods that meet customer expectations or specifications. This term can be used for human activities, from handicrafts to high-tech production.
Manufacturing companies in every work or operational activity have a basic reference and standard used by employees, usually, the standard reference is called SOP (Standard Operating Procedure).
Those are some general understandings of manufacturing, but in a manufacturing company there are several lines or business processes. Here are some business process in manufacturing companies :
Procurement process
This is a business process related to the procurement of goods and other needs in helping business sustainable. Not only materials or raw materials, but also includes spare parts, medical devices, cleaning equipment, building needs, employee needs, carpentry tools, and other materials and components. This process requires completeness as well as efficiency and effectiveness in the selection of these items.
In Out Inventory
Considering the business processes that process raw materials into ready-to-use products, there will automatically be many goods or materials entering and leaving the company. In Out Inventory is a business process that handles the entry and exit of these items, the key is control of goods flow.
Production process
The function of the production process is processing raw materials into finished goods and can be sold to consumers. In reality, there is wider division depend on the needs of the industry. For example, PPIC (Production Planning and Inventory Control) divisions and also QC (Quality Control).
Sales and Marketing
The function of this division is to make sales and marketing to get a profit. For example, the costs of marketing such as promotion costs, transportation costs, warehouse rental fees, employee salary costs when employees are conducting product promotions.
Administration and General
This division is responsible for determining policies, directives, and supervision so that ongoing activities are more effective and efficient. For example, in this department, there are several costs such as accounting fees, employee costs, employee salary costs and others.
Accounting and Finance
Accounting and finance ensure that the finances of a business entity are healthy and able to meet production needs, as well as control over debt. In addition, an accounting, in particular, has an obligation to regulate taxes that must be paid by the factory to the government.
Service-based businesses allow you the freedom to leverage your skills and earn a profit. You can hone in on your passions, such as public relations or writing while helping others. However, there's much more to the practice than designing an attractive website, networking and tackling assignments.
A business is a business, and starting your own company is no easy feat. You want to make sure you know exactly what you're getting into before jumping in. Entrepreneurs who have started service-based businesses weighed in on the challenges and advantages, as well as the best practices for getting your company off the ground.
Why start a service business?
Service-based companies may be less conventional than others, but there are some major benefits of starting one.
Low-cost startup: Developing and selling a physical product takes time, money and energy. Even if you run an e-commerce business, you still have to deal with packaging, shipping, and returns. In a service-based business, your product is you. There are little to no startup, overhead or production costs – all you need to do is build your reputation and get the word out.
"I started [my] business with very little startup investment," said Kathryn Snellen, owner of communications and PR firm Kathryn Elise Studio. "I created my own website, designed business cards, and already had a laptop and office equipment. For me, word-of-mouth recommendations through networking have been and continue to be my biggest lead for potential clients, and I have not had to invest in advertising or marketing for my business."
Flexibility: In many cases, a service business is much more adaptable than a product-based business. In addition to working whenever and wherever you want, you can easily adjust and tailor your service to suit an individual client's needs.
"If a client isn't happy with how a campaign or website is developing, you can make changes according to their feedback in real-time," said Brian Whigham, managing director of digital marketing agency Venn Digital. "This is much more difficult to do for products, which may need testing, licensing and remanufacturing."
Fulfillment: When you're offering your own time and skills rather than a physical product, you are connecting with your clients and consumers on a more personal level. Not only do you profit financially from leveraging your talent, but you also earn a sense of fulfillment from helping others.
The challenges of the service industry
While there are plenty of advantages to a service-based business, there are also a few challenges unique to this type of venture.
Pricing: How do you strike the balance between offering competitive rates and charging what your time is actually worth?
Most service entrepreneurs, especially freelancers, undervalue themselves at first and charge too little to win customers. This is particularly common among entrepreneurs with a time-based pricing model.
"In the beginning, I often underestimated the amount of time and budget we'd need to serve clients well," said Becky Robinson, founder, and CEO of author publicity firm Weaving Influence. To overcome this issue, she established a time-tracking system that allowed her and her team to understand what it actually takes to deliver the company's services to its customers.
If you're offering a few different types of services, Snellen recommended a price "menu" to break down your costs and core service packages, as well as setting an hourly rate. Depending on your specific industry and business, you may also want to consider a retainer pricing model.
Selling yourself: Most service-based entrepreneurs agree that selling themselves as their "product" is one of the most difficult things they had to learn when they started their business.
"With a product, a customer typically understands what he or she is receiving," said Pat Petitti, CEO, and co-founder of the business consultant marketplace Catalant. "You see it, feel it, and you can even try it out. Service-based solutions are quite different, and in our world, a customer may not understand the quality of the solution until months after it's delivered."
Snellen said the most effective way she has learned to market her business is by developing a strong online brand presence, particularly on visual social media platforms like Instagram, Facebook, and YouTube.
"On social media, I share educational and inspirational tips about the industry, behind-the-scenes work with my clients and tidbits about the services I offer – always paired with compelling images and relevant hashtags," Snellen said. "This is a great way for me to grow my following, connect with my ideal clients, and create an organic portfolio of my work that reflects my personality and business."
Steep competition: One of the greatest upsides to a service business is that it's so easy to get started. However, this can also be one of its greatest disadvantages. Just about anyone with your skill set can offer the same types of services you do, so making yourself stand out among the competition might feel like a constant battle.
"There is a very low barrier to entry for service businesses," said Crystal Kendrick, president of professional services firm The Voice of Your Customer. "As a result, competitors pop up with every opportunity. [These] often include part-time entrepreneurs, employed persons seeking additional income, unemployed persons who work as contractors until permanent employment is confirmed, and volunteers seeking experience or engagement."
One way service entrepreneurs can set themselves apart is by offering a tangible product, such as an e-book or guide, to provide extra value and boost credibility. For example, Lisa Baker-King, children's author and certified Kolbe coach, found that publishing a book gave her a product that was consistent with her brand message, and she could also sell it at speaking events to further connect with her audience.
Tips for success
Think you're ready to launch? Here are a few tips to help you out when you present your new business to the world.
Get your finances in order. Just because a service business has lower overhead costs doesn't mean you won't have any at all. Baker-King urged potential entrepreneurs to consider their cash flow before starting up and ensure that they have enough to live on with all their anticipated expenses, especially if they're leaving a full-time job.
"Most business plans I see are 'survive' cash flow analyses," Baker-King said. "You want to 'thrive' cash flow. You might have the best idea on the planet, but if you don't have money to invest to get off the ground, money coming in to fund the business and enough from ... savings or another income source to pay the family bills, then you might need to revisit your business plan."
Don't spread yourself too thin. Depending on the type of business you run, you might be able to develop your services without expanding physically. For example, if you are running a PR business, you can work with clients across the globe without having to meet with them. Other businesses, such as tutoring or professional organizing, often require you to travel to homes or local sites to practice your service.
It might be tempting to distribute your practice outside of your area, but you need to be realistic about your options rather than trying to overachieve. Many service-based entrepreneurs work from home, and it's difficult for them just to meet with clients within an hour radius.
"Customers may not be willing to pay for your travel from relatively remote spots," said Mark Robinson, co-founder of Kimble Applications.
Robinson added that many clients will try to influence you to expand to locations near them. This can be tempting, especially if it's a reliable client you enjoy working with. But you need to prioritize your company's overall needs and choose what makes the most sense for your business.
Accept outside help so you can grow. Because of the nature of some service businesses, some entrepreneurs feel like they can run it as a one-person operation. You might be capable of handling every business task yourself, such as invoicing, accounting and marketing, but outsourcing certain administrative tasks can free you up to really work on growing your business and providing the best work you can.
"Do the work you're great at and outsource the rest," said Emily Rusch, founder of virtual receptionist service Back Office Betties. "If you aren't an accountant, don't waste time trying to crunch numbers. I spent three hours trying to reconcile one monthly bank statement only to give up, frustrated. I hired a bookkeeper, and she had three months reconciled in less than two hours."
Eventually, you may find that you'll need to expand your business and hire full-time staff members. Chad Bronstein, CEO of sales rep hiring service Time to Hire, was hesitant to hire at first, but he soon realized that he wasn't able to do everything himself as his business evolved.
"Building a team is important," Bronstein said. "I waited too long and was in a situation where I had to hire someone immediately. [I needed] better planning and more time. Try to replicate yourself – don't work in your business but on it."
Make sure your workers are dependable. You want to feel like you can rely on them through difficult times – which are often inevitable, especially in new business. Treat them like members of a team, and they will likely perform as such.
"Surround yourself with people you can trust from day one, and don't be afraid to give them options and be generous if they are going to help you achieve your goals," said Robinson.
A business is defined as an organization or enterprising entity
engaged in commercial, industrial, or professional activities.
Businesses can be for-profit entities or non-profit organizations that
operate to fulfill a charitable mission or further a social cause.
The term business also refers to the organized efforts and
activities of individuals to produce and sell goods and services for
profit. Businesses range in scale from a sole proprietorship to an
international corporation. Several lines of theory are engaged with
understanding business administration including organizational behavior, organization theory, and strategic management.
People have conducted business since ancient times; historically,
businesses have involved mercantile operations, trade guilds, or shared
agricultural production.
1:10
Business
The Basics of a Business
Generally, a business begins with a business concept (the idea) and a
name. Depending on the nature of the business, extensive market
research may be necessary to determine whether turning the idea into a
business is feasible and if the business can deliver value to
consumers. The business name can be one of the most valuable assets of a
firm; careful consideration should thus be given when choosing
it. Businesses operating under fictitious names must be registered with
the state.
Businesses most often form after the development of a business plan,
which is a formal document detailing a business's goals and objectives,
and its strategies of how it will achieve the goals and
objectives. Business plans are almost essential when borrowing capital
to begin operations.
It is also important to determine the legal structure of the
business. Depending on the type of business, it may need to secure
permits, adhere to registration requirements, and obtain licenses to
legally operate. In many countries, corporations are considered to be
juridical persons, meaning that the business can own property, take on
debt, and be sued in court.
Key Takeaways
A business is defined as an organization or enterprising entity engaged in commercial, industrial, or professional activities.
Businesses
can be for-profit entities or non-profit organizations that operate to
fulfill a charitable mission or further a social cause.
Businesses range in scale from a sole proprietorship to an international corporation.
Business Structures
Many businesses organize themselves around some sort of hierarchy or
bureaucracy, where positions in a company have established roles and
responsibilities. The most common structures include sole proprietorships, partnerships, corporations, and limited liability companies, with sole proprietorships being the most prevalent.
A sole proprietorship, as its name suggests, is a business owned and
operated by a single natural person. There is no legal separation
between the business and the owner; the tax and legal liabilities of the
business are thus that of the owner.
A partnership is a business relationship between two or more people
who join to conduct business. Each partner contributes resources and
money to the business and shares in the profits and losses of the
business. The shared profits and losses are recorded on each partner's
tax return.
A corporation is a business in which a group of people acts together
as a single entity; most commonly, owners of a corporation are
shareholders who exchange consideration for the corporation's common
stock. Incorporating a business releases owners of financial liability
of business obligations; however, a corporation has unfavorable taxation
rules for the owners of the business.
For this reason, a relatively new (first available in Wyoming in 1977 and other states in the 1990s) business structure, a limited liability company (LLC),
is available; this structure combines the pass-through taxation
benefits of a partnership with the limited-liability benefits of a
corporation.
Business Sizes
Business sizes range from small owner-operated companies, such as family restaurants, to multinational conglomerates
such as General Electric. Larger businesses may issue corporate stock
to finance operations. In this case, the company is publicly traded and
has reporting and operating restrictions. Alternatively, smaller
businesses may operate more independently of regulators.
Industries
A company may describe its business by communicating the industry in
which it operates. For example, the real estate business, advertising
business, or mattress production business are industries in which a
business can exist. Because the term “business” can be interchanged with
day-to-day operations as well as the overall formation of a company,
the term is often used to indicate transactions regarding an underlying
product or service. For example, ExxonMobil transacts business by
providing oil.
