A business entity is an organization that uses economic resources to provide goods or services to customers in exchange for money or other goods and services. Business organizations come in different types and in different forms of ownership.
Trading/ Merchandising Business
This type of business buys products at wholesale price and sells the same at retail price. They are known as "buy and sell" businesses. They profit by selling the products at higher prices than their purchase costs.
A merchandising business buys a product and sells it without changing its form. Examples include all distribution and retail stores such as department stores, grocery, hardware, clothes and accessories shop, consumer electronics, home furniture, appliance stores, drug stores, etc.
Service Business
A service type of business provides intangible products (products with no physical form). Service-type firms offer professional skills, expertise, advice, and other similar products.
Examples of service businesses are:
- Business services, such as accounting, advisory, taxation, advertising, engineering, legal, research agencies, computer programming, etc.
- Personal services, such as laundry, beauty salon, photography
- Automotive repairs, car rental, car wash, parking spaces
- Fitness facilities, amusement parks, bowling centres, golf courses, theatres
- Hospitals and clinics, schools, museums, banks
- Hotel and lodging, and more.
Manufacturing Business
Unlike a merchandising business, a manufacturing business buys products with the intention of using them as raw materials to make a new product. Thus, there is a transformation of the products purchased. A manufacturing business combines raw materials, labour, and overhead costs in its production process. The goods produced will then be sold to customers. Examples include:
- Food processing, such as producing canned meat, frozen goods, dairy products, and bottled drinks, also bakeries and oil mills
- Fabric mills and textile production from cotton, wool, polyester; and also clothing factories that use textile as raw material
- Wood and metal works, such as in building cabinets, tables, chairs
- Oil refineries, chemical labs, plastic and rubber production
- Ship builders, aircraft manufacturers, car makers
- and many other producers and factories
There are different ways to structure a business, and each structure has different legal and financial obligations. It is important that bookkeepers understand the features of different business structures and their reporting requirements.
Sole Trader
- Simple to set up and operate
- The owner has full control of assets and business decisions
- Fewer reporting requirements and is generally a low-cost structure
- The owner can use an individual tax file number (TFN) to lodge tax returns.
- A separate business bank account is not required
- They are required to keep financial records for at least five years
- Has unlimited liability, and owners' personal assets are at risk if things go wrong
- The owner is not able to split business profits or losses with family members
- The owner is personally liable to pay tax on all the income earned.
Partnership
- Relatively easy and inexpensive to set up
- Minimal reporting requirements
- Requires a separate tax file number (TFN)
- Must apply for an Australian business number (ABN) and use it for all business dealings
- Control and management of the business are shared between partners
- Each partner pays tax on their share of the net partnership income they receive
- A partnership tax return must be to be lodged with ATO each year
- Each partner must be responsible for their own superannuation
- Must register for GST if turnover is $75,000 or more.
Company
- The structure is a separate legal entity
- Business structure is more complex to start and run
- High set-up and running costs
- Directors need to understand and comply with the Corporations Act
- Business operations are controlled by directors and owned by the shareholders
- Company members have limited liability
- Money earned by the business belongs to the business
- The company must lodge an annual company tax return with the ATO
- Need to pay an annual ASIC review fee
- Directors are required to complete an annual declaration of solvency.
Trust
- Expensive to set up and operate
- Requires a formal trust deed that details how the trust operates
- Trust must undertake formal administration tasks
- Most trusts are required to lodge an annual tax return with the ATO.
Accounting 101: What you need to know as a startup Xero
The Accounting Cycle
The accounting cycle is a proven method for ensuring all the money earned and spent by a business is properly recorded. This process identifies errors early on, improves bookkeeping accuracy, and can assist in generating financial reports.
The accounting cycle starts with completing an analysis of all transactions and recording them in the journal. Once recorded in the journal, they are posted to the ledgers, and a Trial Balance is prepared.
The Trial Balance contains a list of all General Ledger accounts. Debit balances are separated from credit balances. It is always prepared on a particular date, e.g., at the end of every month, end of every quarter, etc.
The Trial Balance, adjusting entries, and any additional information for the financial statements are recorded in the worksheet. After the completion of the worksheet, the financial statements are finalised. All adjusting and closing entries are then journalised and posted to the ledger.
To ensure all entries were correctly made, a post-closing Trial Balance is prepared to show the equality of debits and credits, as well as to confirm assets, liabilities, and capital accounts with proper open balances.
The figure below shows the steps in the accounting cycle.
