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When learning business and accounting, it’s essential to grasp some fundamental concepts, and at the very heart of it all are goods and services. These aren’t just abstract terms; they’re the building blocks of every transaction, every company, and every economy. In essence, the primary purpose of a business is to create and deliver value to its customers, and this value is conveyed through the exchange of goods and/or services.
Goods are the tangible items that businesses produce or trade, things you can physically touch and own. Think of a smartphone, a loaf of bread, or a car. Businesses sell goods to customers, and these goods are often the products they create or purchase for resale.
Services are the intangible actions or work that one party performs for another. You can’t physically hold a service. Think of a haircut, a taxi ride, or legal advice. Businesses provide services by using their skills and expertise.
Understanding the distinction, and how these elements function within a business, is crucial. This knowledge will form the bedrock upon which you’ll build your understanding of more complex accounting and business principles. As we delve deeper, you’ll see how these concepts are classified and recorded within a company’s financial framework, providing a clear picture of its operations and financial health.
Items and actions in a business – resale vs operational
It’s crucial to distinguish between items and actions that directly generate revenue for a business and those that, while essential, serve a supporting role. This distinction applies to both goods and services.
Goods for resale vs assets for internal functioning
Goods and assets are tangible items in a business. The difference lies in their purpose within the business. Goods that earn income are the company’s reason for existence; they are what the business sells to its customers to make a profit. For instance, a bakery’s cakes, bread, and pastries are all goods that earn income. Each sale of these items contributes directly to the bakery’s revenue.
In contrast, assets that make the company function are the resources the business uses to produce and deliver those income-earning goods. The bakery’s ovens, mixers, and delivery vans are essential for its operations, but they are not sold to customers. These assets enable the bakery to efficiently create and distribute its products, but their value to the business is in their use, not in their sale.
Services done for customers vs services for internal functioning
A similar distinction exists with services. Services done for customers are the actions a business performs for its clients, and these generate revenue. For example, a mechanic provides car repair services to customers, and the fees charged for these repairs are the mechanic’s income.
Services for internal functioning, on the other hand, are those activities that support the business’s operations from within. A company’s IT department maintaining the computer network doesn’t directly generate revenue in the same way that customer service does. Instead, it ensures that the company’s systems function smoothly, enabling other departments to perform their income-generating activities.
Goods and services in accounting: The ALICE framework
In accounting, we use the ALICE framework: Assets, Liabilities, Income, Capital, and Expenses. Let’s see how goods and services fit into this:
Assets
Debtors (customers who owe): When a business sells goods or services on credit, the customers who owe money are called debtors. This is an asset because the business expects to receive payment. Debtors are also known as Accounts receivable.
Prepaid expense (Purchases): When a business pays for goods in advance, it’s a prepaid expense. This is an asset because the business has a right to receive those goods later.
Liabilities
Creditors (suppliers owed): When a business buys goods on credit, it owes money to suppliers. These suppliers are called creditors, and this is a liability. Creditors are also known as Accounts payable.
Prepaid revenue: If a customer pays for goods or services in advance, the business owes them those goods or services. This is a liability.
Income
Cash sales/Credit sales/Revenue: These represent the money earned from selling goods or services. Cash sales are immediate payments, while credit sales are payments received later. Revenue is the total income.
Discount received: Money saved when purchasing goods or services at a lower price.
Returns outwards: Money received from suppliers for returned goods.
Bad debts recovered: Money received from previously written-off debts.
Other income terms: Earnings, benefits, proceeds, takings, yield, commission.
Expenses
Cash purchases/Credit purchases: The cost of goods bought for resale. Cash purchases are paid immediately, while credit purchases are paid later.
Carriage inwards/Carriage outwards: Costs associated with transporting goods to and from the business.
Discount allowed: Money lost when customers pay a lower price.
Returns inwards: Money refunded to customers for returned goods.
Conclusion
Understanding goods and services is fundamental to mastering business and accounting. These concepts are woven into every aspect of business operations and financial reporting. As you progress, you’ll encounter these terms repeatedly. Practising and applying these concepts will make them second nature, allowing you to confidently tackle accounts, reports, and exams. Remember, consistency is key! With dedication and practise, you’ll be well on your way to success in the world of business.
See also:
ALICE: Assets, Liabilities, Income, Capital, Expenses
Accounting Cycle: Complete basic accounting in 8 steps
Goods for resale: Stock, Purchases, Sales, Carriages and Returns
Debit and Credit: Simple view of in and out
Increase and decrease of ALICE accounts
Expenses: Spending that’s direct, indirect, operating and non-operating
