This paper analyzes two types of business models retail business and manufacturing businesses and identifies the various factors that affect their operations. The paper also evaluates the accounting procedures and designs followed when preparing financial statement for each of the business models above. The business report also contains an evaluation of the extent of disclosure required in each of the business types. A comparison of the two business models shows many similarities and differences between the manufacturing business model and the retail business model. The structure of the financial reports such as profit and loss account is completely different (Warren, 2014). The similarities include in areas concerning disclosure of information by the company and the procedures followed when preparing both financial reports. The objective of this paper is to establish the differences and similarities between the various business models and identifying the accounting methods and procedures applied for each business type.
A retail business is a type of business where the trader buys goods from the manufacturer or wholesaler and sells them to the final consumer. The final consumer buys goods from the retailer for final consumption and does not sell them to a third party. Accounting for retail business is different from accounting for services and manufacturing businesses. The accounting process of a retail business begins with preparation of ledgers after a commodity has been sold and the customer has paid for it (Ramakrishnan, 2009). The retail business makes profits by selling at an additional price from what the manufacturer sold to them. The transaction records for a retail business include; general ledger, journals, cash book, profit and loss account, and balance sheet. If the amount is paid on cash, the amount is entered on the debit side of the general ledger to indicate an increase in cash at bank or hand. The ledger credited to indicate decrease in inventory. Goods sold on credit are recorded on the general ledger as accounts receivable and since its an asset, its debited on the general ledger (Duchac, Warren &Reeve, 2011). The information recorded on the general ledger is later transferred to the journals in order to ascertain the accuracy of information entered in the general ledger. Information from the general ledger is then used to prepare the profit and loss appropriation account. The profit and loss account is used to determine the profits or losses accrued by a business over a period of time. The profit and loss account of a retail business contains information such as the total sales for the business, purchases, revenues, expenses, and tax deduction. The profit and loss account indicates the gross revenue and then the net profit of a business. The balance sheet is then prepared after the profit and loss account has been prepared. A balance sheet is a financial report that compares the assets and liabilities of a business. On one side is the short term assets and short term assets and on the other side is the total of capital and total liabilities of a business. The format of a balance sheet is the same for all business types including manufacturing and service business. The trial balance is also prepared to determine omissions and misrepresentation made during the original entry of data. It helps in determining errors that were made during data entry so that the errors can be corrected to ensure that the balance sheet is accurate when preparing financial reports (Epstein& lee, 2010). An income statement is another important financial report prepared for a retail business. The income statement is a financial statement indicating cash inflows and outflows in a business in order to determine the cash flow of a firm. The retail business is able to evaluate the short term liquidity of a business so as to cater for the short term obligations when they fall due.
Disclosures for financial reports for a retail business require that the auditor of a company discloses all the financial information that is relevant for decision making by stakeholders of a business. The stakeholders of a retail business could be the shareholders, creditors, financial institutions, government, and the employees of a business. The following is the format for a profit and loss account for a retail business.
A manufacturing business is the type of business where goods are processed or made. In manufacturing, value is added to a product at every stage of the manufacturing process. The accounting for a manufacturing process involves many procedures that track the manufacturing prices from the raw material point until the point of finished goods inventory. The transaction recorded in a manufacturing account include raw material inventory, purchase of raw materials, direct manufacturing cost, overhead, indirect manufacturing cost and work in process inventory.. It is important to trace the cost incurred at each stage of the manufacturing process in order to prepare financial records for a manufacturing business (Gibson &Haynes, 2013). The financial records prepared fora manufacturing business include profit and loss appropriation account, income statement, and balance sheet. The cost allocation for a manufacturing business could be direct cost, indirect cost, or overhead. When preparing financial statements for a manufacturing business, the cost have to be separated and valuation of each cost done to ascertain its value to the business. There are three types of inventory i.e raw materials inventory, work in process inventory and finished goods inventory. Direct costs could be either direct labor cost or cost of raw materials (Weygandt,kieso& kimmel,2010). Direct cost can be defined as the cost that can be traced back to the final product after manufacturing. Direct costs are core to the manufacturing of a product and they can be separated from the final product easily. The indirect cost is the cost involved in manufacturing of a product but they help to support the manufacturing process. Such cost includes overhead costs such as cost of electricity, indirect labor, miscellaneous supplies, depreciation, and utilities. Manufacturing cannot happen without the indirect cost. The steps involved in recording transaction include:
Transfer of raw material inventory to work-in-process inventory when the production starts in the factory. The next step involves the transfer of completed units to finished goods inventory. At this step, all the cost involved in manufacturing each unit of a product have been accounted for and the product is ready for sale in the market (Chapman,Hopwood, &Shields, 2007). The product is ready for final consumption.
There are other expenses that are incurred by a manufacturing business after the production is completed. Such expenses include sales and marketing expense, transportation expense and accounting expense. These expenses are added to the direct cost of manufacturing in order to determine the total cost of goods sold.
The other financial records for a manufacturing business include the balance sheet and the income statement. The balance sheet of a manufacturing business is the same as that of a retail business. It contains assets, liabilities, and capital of a business. The income statement for a manufacturing business summarizes the net inflows which may include revenue from sales and revenue from disposal of a property. The outflows of a business are then calculated and subtracted from the inflows in order to determine net cash flow of the business.
There are several similarities between the retail business and the manufacturing business. In both business models, the trader incurs significant cost in selling the products. The retail business incurs the cost of selling to the final consumer on cost such as sales cost and advertising cost. The manufacturing business involves direct cost and indirect cost. Another similarity in both business models is that the financial records of balance sheet and the income statement are prepared using the same format (Boyd et al, 2014). The manufacturing business and the retail business have the common objective of profit maximization. Another similarity between the two businesses is that the accounting policies and procedures used when preparing the financial statements are the same. This is meant to ensure uniformity and allow comparison of data from different industries.
There are also several differences between the manufacturing and retail business. The retail business does not involve any transformation of goods but it involves reselling fully processed commodities while the manufacturing business involves the adding value at every stage of the manufacturing process. Another difference between the manufacturing business and the retail business is that the retail business profit and loss account is different from that of manufacturing account account. The retail account involves determining cost of goods sold by adding purchases to expenses. The manufacturing business involves adding the cost of raw materials to all direct and indirect expenses to determine the cost of finished goods(Reeve Warren&Duchac, 2012). In retail business, there is no work in process inventory unlike in manufacturing where there is work in process inventory. Another difference is that goods are marked up for manufacturing business while in retail business, there is no mark up.
Conclusion
The retail business type involves reselling goods that have been bought from manufacturers to the final consumer. Retailers act as a link between the manufacturers and the final consumer. The retail business accounting processes are different from those of manufacturing business. The commodities recorded in retail business financial records are also different since items like cost of selling are not in the manufacturing accounts. The paper analyzes the similarities in both business models with the disclosure for both businesses being almost similar. Manufacturing businesses use the financial records to track their cost and determine ways in which efficiency can be achieved in the organization. Disclose of accounting information helps the stakeholders to make informed decisions based on the information provided.
References
Boyd, k., epstein, l., holtzman, m. P., kass-shraibman, f., loughran, m., sampath, v. S., tracy, j. A., tracy, t. C., & welytok, j. G. (2014). Accounting all-in-one for dummies. Http://www.books24x7.com/marc.asp?Bookid=115175.
Chapman, c. S., hopwood, a. G., & shields, m. D. (2007). Handbook of management accounting research. [volume 2] [volume 2]. Amsterdam, elsevier. Http://site.ebrary.com/id/10158348.
Duchac, j. E., warren, c. S., & reeve, j. M. (2011). Accounting using excel for success. Mason, ohio, south-western.
Epstein, m. J., & lee, j. Y. (2010). Advances in management accounting. Volume 18 volume 18. Bingley, emerald.
Gibson, j. L., & haynes, w. W. (2013). Accounting in small business decisions. Lexington, university of kentucky press. Http://public.eblib.com/choice/publicfullrecord.aspx?P=1915530.
Ramakrishnan, s. (2009). Manufacturing finance with sap erp financials. Bonn, galileo press.
Reeve, j. M., warren, c. S., & duchac, j. E. (2012). Financial & managerial accounting: Using excel for success. Australia, south-western cengage learning.
Tracy, j. A., & barrow, c. (2008). Understanding business accounting for dummies. Chichester, england, john wiley & sons. Http://www.dawsonera.com/depp/reader/protected/external/abstractview/s9781119992127.
Warren, c. S. (2014). Survey of accounting.
Weygandt, j. J., kieso, d. E., & kimmel, p. D. (2010). Managerial accounting: Tools for business decision making. Hoboken, nj, wiley.
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