Nature of Business and Transaction Records
The business involves commercial activities which may be carried out to provide services or to sell goods with the primary objective of earning profits. Based on type of activities, the business is classified into primarily three broad categories such as manufacturing, trade, and service. Further, these sectors are subdivided into different industries such as infrastructure, automotive, finance, advisory and consultancy etc. (Flynn and Koornhof, 2005). The manufacturing business primarily involves production or manufacture of some goods or articles. The trading business involves selling of goods or articles of manufacturers to the consumers. The service business involves provisioning of different types of services which may be for business purposes or personal purposes (Flynn and Koornhof, 2005).
Traditionally, the manufacturing business and trading business were in prevalence and the substantial part of economy of a country was comprised of volumes of manufacturing and trading businesses. However, in the present scenario, the service business has occupied a significant place in the economy. The service sector has emerged as the leading contributor to the economy of a country. The service contributes to the overall economy to the extent of 80% in the United Kingdom and 79.5% in the United States (CIA, 2017). In this context, a report has been prepared here that provides discussion on the two broad business sectors such as manufacturing and service. The discussion in the report covers peculiarities of manufacturing and service sector businesses including the financial reporting aspects.
The service involves activities performed by one person for the use of another in consideration of money. There are different types of services that are being performed by the business entities such as consultancy and advisory services, legal services, accounting services, insurance services, and banking and financing services (Cress, Collier, and Reitenauer, 2013). The business of provisioning of services can be undertaken by an individual, a partnership firm, or a corporation. The form of business such as proprietary, firm, or company would depend upon the size of business; a highly diversified business may be conducted in the form of a company while a small business may take place in proprietary form (Fontana, 2010).
The business of provisioning of services is carried out based on the terms of contract entered into between the service providers and the service receiver. The service provider and service receiver agree to the terms through a legally binding contract which provides for nature of service to be rendered and the amount of consideration to be paid (Cress, Collier, and Reitenauer, 2013).
Financial Reports Formats and Extend of Disclosure
Figure 1: Service Business Model
[Source: https://www.pittsburg.k12.ca.us/domain/62]
The business of service involves labor as primary resource and the rest of the resources such as material, machinery, and money are secondary. The services are provided through labor therefore it is customary for the business to arrange labor fist and then think of other sources (Cress, Collier, and Reitenauer, 2013).
From the accounting and financial reporting perspective, the service business differs from the trading and manufacturing business. The accounting aspects of the service business also require special considerations (PWC, 2014). For example, the revenue recognition from rendering of service would be different from the revenue recognition in case of sale of goods. However, the form of financial statements would depend upon the legislature of a particular country. The form of financial statement for service as well as trading and manufacturing businesses is same in some countries whereas some countries provide for different form of financial statements in the case of specified services such as banking and finance, insurance, and electricity (PWC, 2014).
Thus, the form of financial statements prepared to external users may be different in case of service providing firms from that generally followed. However, the primary elements of the financial statements would include a statement of income, balance sheet, statement of changes in equity, and a cash flow statement. Further, the internal financial reports used for managerial purposes are also unique in service industry. The focus of a firm engaged in providing services is on the quality of services (Mohanty and Lakhe, 2008). The quality of service is the growth driver in the service industry. Therefore, the management seeks quality of customer service report, total quality report, and customer satisfaction report. Apart from the service quality reports, the management also seeks for cost report to analyze the costs incurred in providing the services (Mohanty and Lakhe, 2008).
The costing of service sector is also unique but it is not as difficult as in the costing of manufacturing. The two most commonly used methods of costing in service sector are job costing and operating costing (Baum, 2012). The job costing is applied to prepare records of costs incurred in completing a particular job. The job costing is useful for the businesses such as repair and maintenance and medical services or other business where the job is performed on a special order of the customer. Further, the operating costing is applied in the business of transportation (Baum, 2012).
Differences between Manufacturing and Service Businesses
The manufacturing business involves activities performed to produce or manufacture an article or thing with the use of three crucial resources such as man, money, material and machinery. The material and machinery are the two primary sources of manufacturing business (Warren, Reeve, and Duchac, 2008). The raw material is converted into finished product through processing with the use of plant and machinery. The typical process in manufacturing business involves three steps such as buying raw material from suppliers, processing on the raw material in the plant, and selling the finished product in the market (Warren, Reeve, and Duchac, 2008).
Figure 2: Manufacturing Business
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There are various types of records that a manufacture has to maintain. The primary book records of a manufacturer involves records of material bought from suppliers, material consumed in the production process, the finished goods produced, sale of finished goods, records of customer outstanding and other ancillary records. The financial statements of a manufacturing business would generally include income statement, balance sheet, cash flow statement, and changes in equity. The form of financial statements to be prepared for external purposes is prescribed in the governing statue of the country (Warren, Reeve, and Duchac, 2017).
Further, there are many reports which are used for internal purposes by the management for decision making. In a manufacturing business, the management seeks product cost reports, inventory reports, receivables management report for decision making purposes. Further, there are other reports such as plant maintenance, capacity utilization, and waste management etc. that can also be called for by the management (Warren, Reeve, and Duchac, 2017).
The records for costing purposes assume high importance in the manufacturing businesses because of involvement of multistep process. The management needs to apply cost controls and for which it is essential to maintain detailed records of cost items (Cokins, 2002). The activity based costing is applied in the manufacturing business to analyze the costs incurred on production or manufacturer of goods. The activity based costing is considered the most appropriate technique to allocate the overheads to the products. The allocation of overheads in activity based costing is made through both volume based as well as non-volume based cost drivers (Cokins, 2002).
Further, monitoring the inventory is also a special aspect of manufacturing business. The inventory comprises a substantial part of the overall cost and thus, it is essential to monitor it with high degree of caution (Magad, 2013). For this purpose, the management seeks reports that provide details of inventory minimum level, maximum level, re-order level and economy order quantity. Apart from this, there are various types of budgets prepared in the manufacturing business to plan the level of activities for future. The commonly prepared budgets include sales budget, production budget, material budget, labor budget, and overhead budget (Magad, 2013).
Conclusion
The services which are intangible in nature are different from the tangible goods or articles. Since the services are materially different from the manufacturing of goods or articles therefore the internal process and book records of servicing business and manufacturing business differ from each other (Oliver, 2000). The rendering of services involves two parties such as service provider and service receiver while manufacturing business involves three main parties such as supplier, manufacturer, and customer. Further, the need for transportation and logistics management is one crucial aspect of manufacturing business while the service providing firm does not need to have logistics management in place. The manufacturer needs to have in place an adequate supply chain management system while there is less need of supply chain management in the service providing firm (Oliver, 2000).
The manufacturing and service organizations operate in different environments. The legal and economic risks for manufacturing and service industry would also be different from each other. A manufacturing firm needs to strictly comply with the laws related to environment or climate and pollution (Atkinson, 2009). On the other hand, the service firm is not required to seek compliance with such laws unless it produces pollutants. Further, there are many differences between the servicing business and manufacturing business. One of them is the difference in organizational structures. The organizational structure of a manufacturing firm differs substantial from that of a service providing firm. A typical manufacturing firm involves sales department, production department, material handling, production flour management, advertisement and publicity (Atkinson, 2009).
A service providing firm also needs have these departments in place however the processes within these departments will be different in a service providing firm. Further, the manufacturing business also differs from service business in terms of capital requirements (Atkinson, 2009). A service providing firm could start business with a small amount of capital investment while in case of manufacturing business; the capital investments would be high. The manufacturing business needs large set ups of plant and office and storage facilities while a service providing firm does not such large plant and office facilities (Atkinson, 2009).
The major expenses of manufacturing business involve cost of material, depreciation of plant and machinery, building, and facilities while a servicing firm spends major part of its revenue on the labor charges (Atkinson, 2009). A professional service firm providing management consultancy or accounting services would spend nearly half of its total revenues on salary and remuneration of staff. Further, it is obligatory for a service provider to provide services as per the terms agreed with the customer, however, a manufacturer need not produce goods as per instructions of any particular customer (Atkinson, 2009).
In a large manufacturing firm, the accounting and bookkeeping process could be quite hectic; thus, it requires to an integrated accounting system. However, the service firms do not normally have that much of complexity in accounting and bookkeeping (Atkinson, 2009). The service providing firms can maintain records using a simple spreadsheet. Further, the client base of manufacturing firm is whole sellers while the client base of service firm may be business entities or non business entities. In the recent years, it has been observed that the service sector is enhancing at a rapid pace. The growth rate of service sector is higher than the manufacturing sector. The service sector has now become the leading contributor to the gross domestic product of a country (Atkinson, 2009).
Conclusion
The discussion carried out in this report addresses peculiarities of two types of businesses such as service and manufacturing. Further, the report also provides discussion on the key differences between the two types of businesses. From the discussion, it could be articulated that the service business has grown significantly over the years and now it is surpassing the manufacturing business. The revenues generated by the service sector are significant for the economy of a country. Further, it has been found out that two types of businesses differ from each other on various aspects. The manufacturing business requires high capital investments whereas service business could be set up with small capital investments. The manufacturing business involves supply chain management as a crucial aspect but the same is not so crucial in case of service business.
References
Atkinson. 2009. Management Accounting. Pearson Education India.
Baum, M.B. 2012. Service Business Costing: Cost Accounting Approach for the Service Industry. Springer Science & Business Media.
CIA. 2017. The world fact-book. [Online]. Available at: https://www.cia.gov/library/publications/the-world-factbook/fields/2012.html [Accessed on: 05 June 2017].
Cokins, G. 2002. Activity-Based Cost Management: An Executive’s Guide. John Wiley & Sons.
Cress, C.M., Collier, P.J., and Reitenauer, V.L. 2013. Learning Through Serving: A Student Guidebook for Service-Learning and Civic Engagement Across Academic Disciplines and Cultural Communities, Second Edition. Stylus Publishing, LLC.
Flynn, D. and Koornhof, C. 2005. Fundamental Accounting. Juta and Company Ltd.
Fontana, P.K. 2010. Choosing the Right Legal Form of Business: The Complete Guide to Becoming a Sole Proprietor, Partnership, LLC, or Corporation. Atlantic Publishing Company.
Magad, E.L. 2013. Total Materials Management: The Frontier for Maximizing Profit in the 1990s. Springer Science & Business Media.
Mohanty, R.P. and Lakhe, R.R. 2008. TQM in the Service Sector. Jaico Publishing House.
Oliver, L. 2000. The Cost Management Toolbox: A Manager’s Guide to Controlling Costs and Boosting Profits. AMACOM Div American Mgmt Assn.
PWC. 2014. Financial statement presentation. [Online]. Available at: https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-guide-financial-statement-presentation-2014.pdf [Accessed on: 05 June 2017].
Warren, C.S., Reeve, J.M., and Duchac, J. 2008. Corporate Financial Accounting. Cengage Learning.
Warren, C.S., Reeve, J.M., and Duchac, J. 2017. Accounting, Chapters 14-26. Cengage Learning.
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