Week 4

Question 1

What is a service business?

Answer 1

A service business is a business which offers a service based on a personal skill for which other people are willing to pay e.g. accountant, doctor, cleaner

Question 2

What are the 6 steps to follow when accounting for a service/trading business?

Answer 2

1) Identify the type of transaction taking place
2) Identify the debit and credit entries and repeat
3) Record the debits and credits in the running balance accounts
4) Transfer closing balances to the trial balance
5) Make sure TOTAL DEBITS=TOTAL CREDITS
6) Prepare Income Statement and Statement if Financial Position

Question 3

What is a trading business?

Answer 3

A trading business is a business buying goods for resale. Will hold inventories(stocks of goods).
Manufacturing process: converting raw materials to finished products. Will hold inventories of:
- Raw Materials
- Work-In-Progress
-Finished Goods

Question 4

What is the process of a trading business?

Answer 4

Buy goods → Resell Goods

And/or
Buy goods → Manufacturing Process → Sell Final product

Question 5

How do businesses make profits?

Answer 5

Businesses make profits by selling the goods at a higher price than it cost to purchase them.
Costs then have a different:
-Purchase Price
-Sales Price

Sales-Cost of Sales=Gross Profit
Gross Profit=Buying and Selling Activity

Question 6

What is the purchase price and sales price?

Answer 6

Purchase Price →Raw Materials →Work In Progress →Finished Goods →Cost of Sales

Sales Price →Sales to customers