Business Types and Operations

🏪 The Three Shops: Understanding Business Types

Imagine a street with three different shops. Each one makes money in a completely different way!

🎯 The Big Picture

Think of businesses like lemonade stands — but grown up! There are three main types:

graph TD
    A["🏢 All Businesses"] --> B["🛠️ Service"]
    A --> C["🛒 Merchandising"]
    A --> D["🏭 Manufacturing"]
    B --> E["Sells Skills"]
    C --> F["Buys & Sells Products"]
    D --> G["Makes Products"]

🛠️ Service Business: The Helper Shop

What Is It?

A service business sells help, not things you can touch. They sell their time and skills.

The Lemonade Stand Analogy

Imagine you don’t sell lemonade. Instead, you help your neighbor carry groceries for $5. You didn’t sell anything you can hold — you sold your help!

Real Examples

How Service Accounting Works

The Simple Formula:

Revenue (Money In)
  - Expenses (Costs)
  = Net Income (Profit)

Example: Sam’s Tutoring Service

• Sam charges $50 per hour for math tutoring
• This month: 20 hours of tutoring
• Revenue: $50 × 20 = $1,000
• Expenses: $100 (books, internet)
• Net Income: $1,000 - $100 = $900 profit! 🎉

Key Point 🔑

No inventory! Service businesses don’t buy products to sell. Their “product” is their skill and time.

🛒 Merchandising Business: The Reseller Shop

What Is It?

A merchandising business buys products from someone else, then sells them to you — for a higher price!

The Lemonade Stand Analogy

Imagine you buy cookies from a bakery for $1 each. You sell them at your stand for $2 each. You didn’t make the cookies — you just bought and resold them!

Real Examples

How Merchandising Accounting Works

The Special Formula:

Sales Revenue
  - Cost of Goods Sold (COGS)
  = Gross Profit
  - Operating Expenses
  = Net Income

🆕 New Term: Cost of Goods Sold (COGS)

This is what you paid for the stuff you sold.

Example: Maya’s Toy Store

• Maya buys toys for $10 each
• She sells them for $25 each
• This month: Sold 100 toys

Key Point 🔑

Inventory matters! Merchandisers must track what they bought, what they sold, and what’s still on the shelf.

🏭 Manufacturing Business: The Maker Shop

What Is It?

A manufacturing business takes raw materials and transforms them into finished products to sell.

The Lemonade Stand Analogy

Now imagine you actually make lemonade! You buy lemons, sugar, and water. You mix them together. You sell the lemonade. You created something new!

Real Examples

How Manufacturing Accounting Works

Three Types of Inventory!

graph TD
    A["📦 Raw Materials"] --> B["⚙️ Work in Progress"]
    B --> C["✅ Finished Goods"]
    C --> D["💰 Sold!"]

The Manufacturing Formula

Sales Revenue
  - Cost of Goods Manufactured
  = Gross Profit
  - Operating Expenses
  = Net Income

🆕 New Term: Cost of Goods Manufactured

This includes:

• Raw materials used
• Labor (workers who make it)
• Overhead (factory rent, electricity, machines)

Example: Tom’s Cookie Factory

If Tom sells all cookies for $3,000:

• Gross Profit = $3,000 - $1,500 = $1,500 🎉

🆚 The Big Comparison

Side-by-Side View

The Money Flow

graph LR
    subgraph Service
    A1["Skill"] --> B1["💵 Revenue"]
    end

    subgraph Merchandising
    A2["Buy Product"] --> B2["Sell Product"] --> C2["💵 Revenue"]
    end

    subgraph Manufacturing
    A3["Raw Materials"] --> B3["Make Product"] --> C3["Sell Product"] --> D3["💵 Revenue"]
    end

🎯 Quick Memory Tricks

Remember the Three Types:

• Service = Skills (no stuff)
• Merchandising = Middleman (buy & sell)
• Manufacturing = Make it yourself

The Inventory Rule:

🌟 Why This Matters

Understanding business types helps you:

1. Read financial statements correctly
2. Compare companies fairly (don’t compare Apple stores to Apple factories!)
3. Make smart decisions about costs and pricing
4. Understand where the money goes

🎬 Real World Story

Meet Sarah’s Journey:

Sarah starts as a tutor (service) → teaches piano for $40/hour.

She gets popular! Opens a music store (merchandising) → buys instruments for $100, sells for $200.

She gets even bigger! Opens a guitar factory (manufacturing) → buys wood and strings, makes custom guitars, sells them for $1,000.

Same person. Three different business types. Three different accounting methods!

✨ Key Takeaways

1. Service businesses sell help — no inventory
2. Merchandising businesses buy and resell — track what’s on shelves
3. Manufacturing businesses make products — track materials, work in progress, and finished goods
4. Each type has its own way of calculating profit
5. Cost of Goods Sold only appears in merchandising and manufacturing

You now understand the three main business types! 🎉