Monday, 27 Jan 2025
Bookkeeping is a complex task that changes with business type, size and structure. Entrepreneurs must know that they will have to perform financial evaluations differently if they own a service-based business compared to a product-based entity. Service-based businesses are quite different from product-based ones because of their offerings. While services are intangible and experiential in nature, products are tangible and manufactured or retailed by business owners. Examples of services include legal consultation, senior care services, pool cleaning businesses, fitness studios, hair salons, handymen, etc.
Product-based goods include physical goods that buyers can touch, use and consume, such as clothes, shoes, books, packaged foods, smartphones, TVs, gardening tools, etc. Both goods and services are in-demand merchandise for the population. Let us understand how bookkeeping differs for service and product-based businesses. It can help entrepreneurs make the right financial decisions.
Since bookkeeping involves inventory management, they have to keep track of the stock and ensure the required units are available. They do not stock extra units unnecessarily, which incurs costs and can even lead to damage to goods. So, they have to ensure the business is neither understocked nor overstocked. They forecast cash flow as per the historical data and take charge of this activity by liaising with the suppliers.
They also have to record the cost of buying stock, storage and the volume and prices of items sold. All this information is needed to understand the profit and loss made by the entity. These steps work well for a product-based business. However, when it comes to a service-based venture, there is no stock for storage or requirement for ordering items. Thus, bookkeepers in Melbourne have to determine the cost of goods sold for product-based businesses and the cost of services for service-based businesses without worrying about managing stocks.
Revenue recognition is an important part of accrual accounting which is used by most professional Melbourne bookkeepers. t involves recording revenue when the income is earned instead of waiting for the time until it is credited to the business account. It maintains the accuracy of the books and helps keep them up-to-date to make informed decisions based on the right information. So, for product-based businesses, revenue is recorded when the order is confirmed and the product is packed and shipped.
For service-based businesses, revenue is recorded when the service is delivered and is calculated by the number of hours required or objectives accomplished. For example, an online tutor will record revenue based on the billable hours.
Preparing financial statements like income, cash flow, and balance sheets is integral to bookkeeping. These reports provide insight into the business’s income, expenses, assets, liabilities and cash flow. For product-based entities, bookkeepers have to create a separate section for the cost of goods sold in the profit and loss or income statement. It offers details of costs incurred in procuring materials, production, packaging, marketing and distribution of the goods.
It ensures the business owner knows how much is spent and the expense of selling one stock unit. Generating financial statements for service-based businesses is easier because of the absence of inventory management. The income statement includes operating costs and the income generated from the services rendered. Various types of costs get eliminated, which makes it easy to prepare and understand.
When completing bookkeeping in Melbourne for product-based businesses, professionals have to keep track of a wide range of expenses. These include the direct cost of raw materials, worker’s compensation, packaging overheads, shipping costs, storage expenses, manufacturing expenses, production facility rent, energy consumption during manufacturing, and cost of leased or purchased equipment and its maintenance.
On the other hand, most of these costs are eliminated for a service-based business. They only have to keep track of the operational and labour costs. Some of these businesses are run from home or online, which further reduces the expense of leasing an office space and buying equipment for production.
The absence of tangible products in service-based businesses makes all the difference between the two types of entities. Product-based entities have to include information about the different product lines, the cost of selling one unit, stock management and more. Conversely, service-based ventures have to keep track of billable hours for the service provided and labour costs.
So, the chart of accounts focuses more on inventory costs for product-based businesses, and other costs become prominent in the chart of accounts for service-based businesses. Income and expenses create different visions for businesses in these charts. It is a given that product-based businesses require more effort and calculations that can be streamlined with the help of digital tools.
Bookkeepers are well-versed in performing all tasks related to financial management and compliance. They customise the books according to the business type, size and offerings. Entrepreneurs should know the subtle differences to understand financial reports and bookkeeping needs of their venture.
