We can classify organizations into three categories: for profit,
governmental, and not for profit. These organizations are similar
in several aspects. For example, each of these organizations has
inflows and outflows of cash and other resources, such as
equipment, furniture, and land, that must be managed. In addition,
all of these organizations are formed for a specific purpose or
mission and want to use the available resources in an efficient
manner—the organizations strive to be good stewards, with the
underlying premise of being profitable. Finally, each of the
organizations makes a unique and valuable contribution to society.
Given the similarities, it is clear that all of these organizations
have a need for accounting information and for accountants to
provide that information.
There are also several differences. The main difference that
distinguishes these organizations is the primary purpose or mission
of the organization, discussed in the following sections.
For-Profit Businesses
As the name implies, the primary purpose or mission of a
for-profit business is to earn a profit by selling
goods and services. There are many reasons why a for-profit
business seeks to earn a profit. The profits generated by these
organizations might be used to create value for employees in the
form of pay raises for existing employees as well as hiring
additional workers. In addition, profits can be reinvested in the
business to create value in the form of research and development,
equipment upgrades, facilities expansions, and many other
activities that make the business more competitive. Many companies
also engage in charitable activities, such as donating money,
donating products, or allowing employees to volunteer in the
communities. Finally, profits can also be shared with employees in
the form of either bonuses or commissions as well as with owners of
the business as a reward for the owners’ investment in the
business. These issues, along with others, and the associated
accounting conventions will be explored throughout this course.
In for-profit businesses, accounting information is used to
measure the financial performance of the organization and to help
ensure that resources are being used efficiently. Efficiently using
existing resources allows the businesses to improve quality of the
products and services offered, remain competitive in the
marketplace, expand when appropriate, and ensure longevity of the
business.
For-profit businesses can be further categorized by the types of
products or services the business provides. Let’s examine three
types of for-profit businesses: manufacturing, retail (or
merchandising), and service.
Manufacturing Businesses
A manufacturing business is a for-profit
business that is designed to make a specific product or products.
Manufacturers specialize in procuring components in the most basic
form (often called direct or raw materials) and transforming the
components into a finished product that is often drastically
different from the original components.
As you think about the products you use every day, you are
probably already familiar with products made by manufacturing
firms. Examples of products made by manufacturing firms include
automobiles, clothes, cell phones, computers, and many other
products that are used every day by millions of consumers.
In
Job Order Costing, you will examine the process of job
costing, learning how manufacturing firms transform basic
components into finished, sellable products and the techniques
accountants use to record the costs associated with these
activities.
CONCEPTS IN PRACTICE
Manufacturing
Think about the items you have used today. Make a list of the
products that were created by manufacturing firms. How many can you
think of? Think of the many components that went into some of the
items you use. Do you think the items were made by machines or by
hand?
If you are in a classroom with other students, see who has used
the greatest number of items today. Or, see who used the item that
would be the most complex to manufacture.
If you are able, you might consider arranging a tour of a local
manufacturer. Many manufacturers are happy to give tours of the
facilities and describe the many complex processes that are
involved in making the products. On your tour, take note of the
many job functions that are required to make those items—from
ordering the materials to delivering to the customer.
Retail Businesses
Manufacturing businesses and retail (or merchandising)
businesses are similar in that both are for-profit businesses that
sell products to consumers. In the case of manufacturing firms, by
adding direct labor, manufacturing overhead (such as utilities,
rent, and depreciation), and other direct materials, raw components
are converted into a finished product that is sold to consumers. A
retail business (or merchandising business), on
the other hand, is a for-profit business that purchases products
(called inventory) and then resells the products without altering
them—that is, the products are sold directly to the consumer in the
same condition (production state) as purchased.
Examples of retail firms are plentiful. Automobile dealerships,
clothes, cell phones, and computers are all examples of everyday
products that are purchased and sold by retail firms. What
distinguishes a manufacturing firm from a retail firm is that in a
retail firm, the products are sold in the same condition as when
the products were purchased—no further alterations were made on the
products.
Did you happen to notice that the product examples listed in the
preceding paragraph (automobiles, clothes, cell phones, and
computers) for manufacturing firms and retail firms are identical?
If so, congratulations, because you are paying close attention to
the details. These products are used as examples in two different
contexts—that is, manufacturing firms make these products, and retail firms
sell these products. These products
are relevant to both manufacturing and retail because they are
examples of goods that are both manufactured and sold directly to
the consumer. While there are instances when a manufacturing firm
also serves as the retail firm
(Dell computers, for example), it
is often the case that products will be manufactured and sold by
separate firms.
CONCEPTS IN PRACTICE
NIKEiD
NIKEiD is a program that allows consumers to design and purchase
customized equipment, clothes, and shoes. In 2007,
Nike opened its first NIKEiD
studio at Niketown in New York City.1
Since its debut in 1999, the NIKEiD concept has flourished, and
Nike has partnered with
professional athletes to showcase their designs that, along with
featured consumer designs, are available for purchase on the NIKEiD
website.
Assume you are the manager of a sporting goods store that sells
Nike shoes. Think about the concept of NIKEiD, and consider the
impact that this concept might have on your store sales. Would this
positively or negatively impact the sale of
Nike shoes in your store? What
are steps you could take to leverage the NIKEiD concept to help
increase your own store’s sales?
Considerations like this are examples of what marketing
professionals would address. Nike
wants to ensure this concept does not negatively impact the
existing relationships it has, and
Nike works to ensure this program
is also beneficial to its existing distribution partners.
In
Merchandising Transactions you will learn about
merchandising transactions, which include concepts and specific
accounting practices for retail firms. You will learn, among other
things, how to account for purchasing products from suppliers,
selling the products to customers, and prepare the financial
reports for retail firms.
Service Businesses
As the term implies, service businesses are businesses that
provide services to customers. A major difference between
manufacturing and retail firms and service firms is that service
firms do not have a tangible product that is sold to customers.
Instead, a service business does not sell tangible
products to customers but rather provides intangible benefits
(services) to customers. A service business can be either a
for-profit or a not-for-profit business.
Figure 1.5 illustrates the distinction between manufacturing,
retail, and service businesses.
Examples of service-oriented businesses include hotels, cab
services, entertainment, and tax preparers. Efficiency is one
advantage service businesses offer to their customers. For example,
while taxpayers can certainly read the tax code, read the
instructions, and complete the forms necessary to file their annual
tax returns, many choose to take their tax returns to a person who
has specialized training and experience with preparing tax returns.
Although it is more expensive to do so, many feel it is a
worthwhile investment because the tax professional has invested the
time and has the knowledge to prepare the forms properly and in a
timely manner. Hiring a tax preparer is efficient for the taxpayer
because it allows the taxpayer to file the required forms without
having to invest numerous hours researching and preparing the
forms.
The accounting conventions for service businesses are similar to
the accounting conventions for manufacturing and retail businesses.
In fact, the accounting for service businesses is easier in one
respect. Because service businesses do not sell tangible products,
there is no need to account for products that are being held for
sale (inventory). Therefore, while we briefly discuss service
businesses, we’ll focus mostly on accounting for manufacturing and
retail businesses.
YOUR TURN
Categorizing Restaurants
So far, you’ve learned about three types of for-profit
businesses: manufacturing, retail, and service. Previously, you saw
how some firms such as Dell serve
as both manufacturer and retailer.
Now, think of the last restaurant where you ate. Of the three
business types (manufacturer, retailer, or service provider), how
would you categorize the restaurant? Is it a manufacturer? A
retailer? A service provider? Can you think of examples of how a
restaurant has characteristics of all three types of
businesses?
Solution
Answers will vary. Responses may initially consider a restaurant
to be only a service provider. Students may also recognize that a
restaurant possesses aspects of a manufacturer (by preparing the
meals), retailer (by selling merchandise and/or gift cards), and
service provider (by waiting on customers).
Governmental Entities
A governmental entity provides services to the
general public (taxpayers). Governmental agencies exist at the
federal, state, and local levels. These entities are funded through
the issuance of taxes and other fees.
Accountants working in governmental entities perform the same
function as accountants working at for-profit businesses.
Accountants help to serve the public interest by providing to the
public an accounting for the receipts and disbursements of taxpayer
dollars. Governmental leaders are accountable to taxpayers, and
accountants help assure the public that tax dollars are being
utilized in an efficient manner.
Examples of governmental entities that require financial
reporting include federal agencies such as the Social Security
Administration, state agencies such as the Department of
Transportation, and local agencies such as county engineers.
Students continuing their study of accounting may take a
specific course or courses related to governmental accounting.
While the specific accounting used in governmental entities differs
from traditional accounting conventions, the goal of providing
accurate and unbiased financial information useful for
decision-making remains the same, regardless of the type of entity.
Government accounting standards are governed by the
Governmental Accounting Standards Board (GASB).
This organization creates standards that are specifically
appropriate for state and local governments in the United
States.
Not-for-Profit Entities
To be fair, the name “not-for-profit” can be somewhat confusing.
As with “for-profit” entities, the name refers to the primary
purpose or mission of the organization. In the case of for-profit
organizations, the primary purpose is to generate a profit. The
profits, then, can be used to sustain and improve the business
through investments in employees, research, and development, and
other measures intended to help ensure the long-term success of the
business.
But in the case of a nonprofit (not-for-profit)
organization the primary purpose or mission is to serve a
particular interest or need in the community. A not-for-profit
entity tends to depend on financial longevity based on donations,
grants, and revenues generated. It may be helpful to think of
not-for-profit entities as “mission-based” entities. It is
important to note that not-for-profit entities, while having a
primary purpose of serving a particular interest, also have a need
for financial sustainability. An adage in the not-for-profit sector
states that “being a not-for-profit organization does not mean it
is for-loss.” That is, not-for-profit entities must also ensure
that resources are used efficiently, allowing for inflows of
resources to be greater than (or, at a minimum, equal to) outflows
of resources. This allows the organization to continue and perhaps
expand its valuable mission.
Examples of not-for-profit entities are numerous. Food banks
have as a primary purpose the collection, storage, and distribution
of food to those in need. Charitable foundations have as a primary
purpose the provision of funding to local agencies that support
specific community needs, such as reading and after-school
programs. Many colleges and universities are structured as
not-for-profit entities because the primary purpose is to provide
education and research opportunities.
Similar to accounting for governmental entities, students
continuing their study of accounting may take a specific course or
courses related to not-for-profit accounting. While the specific
accounting used in not-for-profit entities differs slightly from
traditional accounting conventions, the goal of providing reliable
and unbiased financial information useful for decision-making is
vitally important. Some of the governmental and regulatory entities
involved in maintaining the rules and principles in accounting are
discussed in
Explain Why Accounting Is Important to Business
Stakeholders.
YOUR TURN
Types of Organizations
Think of the various organizations discussed so far. Now try to
identify people in your personal and professional network who work
for these types of agencies. Can you think of someone in a career
at each of these types of organizations?
One way to explore career paths is to talk with professionals
who work in the areas that interest you. You may consider reaching
out to the individuals you identified and learning more about the
work that they do. Find out about the positive and negative aspects
of the work. Find out what advice they have relating to education.
Try to gain as much information as you can to determine whether
that is a career you can envision yourself pursuing. Also, ask
about opportunities for job shadowing, co-ops, or internships
Solution
Answers will vary, but this should be an opportunity to learn
about careers in a variety of organizations (for-profit including
manufacturing, retail, and services; not-for-profit; and
governmental agencies). You may have an assumption about a career
that is based only on the positive aspects. Learning from
experienced professionals may help you understand all aspects of
the careers. In addition, this exercise may help you confirm or
alter your potential career path, including the preparation
required (based on advice given from those you talk with).