SERVICE BUSINESS : RECOGNITION OF
INCOME
Service companies have the most basic income
statement of all the types of companies. Since
service based companies do not sell a product, the
income statement will not contain cost of goods
sold. Therefore, the income statement will be a
basic breakdown of income and expenses. Begin
with income. Then subtract all operating expenses.
The difference between income and operating
expenses is operating income. In this case, all
expenses are period costs. There are no product
costs associate with a service company.
In this example, I have indented all of the operating
expenses. This allows the reader to easily see the
individual operating expenses. The operating
expenses in this case were listed from largest to
smallest. That makes it easy for the users of the
statement to see the largest expenses and those that
make the biggest impact on the bottom line without
having to search for them. The total operating
expenses have been pushed out to the third column
to show the reader that the $80,200 has been
subtracted from the $100,000 to obtain operating
income of $19,800. Use underlining in your
spreadsheet to show that a computation is being
performed. The service company income statement
is very basic. Just remember the basic formula for
income statements: Revenue – Expenses =
Operating income.
TRADING / MERCHANDISING :
RECOGNITION OF INCOME
Merchandising companies sell products but do not
make them. Therefore, these companies will have
cost of goods sold but the calculation is much easier
than for a manufacturing company. Expenses for a
merchandising company must be broken down into
product costs (cost of goods sold) and period costs
(selling and administrative). Just like all income
statements, the first line is revenue. In the case of a
business that sells a product, we refer to revenue as
Sales or Sales Revenue. This lets the reader know
that the company generates its revenue from the sale
of products rather than the delivery of services.
Example #1 Kingram Pencil Pushers sells pencils
to office supply stores and other retailers around the
world. On January 1, the company’s inventory was
$41,000. During the year, the company purchased
$895,000 worth of pencils. A physical count of the
inventory on December 31 revealed that there were
$23,000 worth of pencils remaining. Calculate cost
of goods sold for the year.
MANUFACTURING BUSINESS : manufacturing overhead costs. These costs are our
RECOGNITION OF INCOME “something added to the account.”

Manufacturing companies are companies that make

a product. Because these companies have inventory
in various stages of production, there are three
inventory accounts that we must deal with in order
to calculate cost of goods sold. The three inventory
accounts are

1.Raw materials inventory Finished Goods Inventory and Cost of Goods Sold
(FINALLY!!)
2.Work-in-progress inventory
We have finally made it to the last room. We have
3.Finished goods inventory transferred cost of goods manufactured into finished
goods inventory. For this room, this is our
“something”. Add beginning inventory and subtract
ending inventory balances for finished goods
inventory and we are done.

Raw Materials Inventory

Raw materials inventory is the inventory of

materials waiting to go into production. These are
components of our product that have been
purchased to make our product.

Work-In-Progress Inventory

Now that we have put materials into production,

what else goes into the cost of our product? The
three product costs are direct materials (which we
have already placed in the room), direct labor, and
manufacturing overhead. These three accounts are
also called manufacturing costs. Add the cost of
materials used in production to direct labor and
SAMPLE INCOME STATEMENT FOR A
MANUFACTURING BUSINESS
HOW TO COME UP WITH A BUSINESS
IDEA
1.DEVELOPING AN IDEA
2.EVALUATING YOUR IDEAS
3.MAKING YOUR IDEA A REALITY
1.DEVELOPING AN IDEA
a. Think about what goods or services would
improve your life. Keep a list of your personal
strengths and weaknesses in mind. Spend some time
considering your own experiences. With some time
and creativity, you can probably identify several
products or services that help you.
b. Decide whether you’d like to provide a
product or a service. Both requires thought and
creativity and have advantages and challenges that
you should consider before focusing on one or the
other.
c. Identify a problem with the existing industry.
Frequently, business or inventions began because
someone was frustrated with the current way of
doing things.
d. Build upon an existing business idea. Rather
than a problem with the current industry, you might
notice something that a business does well. Take
that and see if you can improve upon it.
e. Look towards the future. Successful
entrepreneurs are innovators. They don’t stick with
old methods or technologies, but rather look ahead
and see what will be successful in the future.
f. Conduct Preliminary consumer research.
While market research is usually only used after
you have an idea, you can do some early research to
discover what people value. This can help you come
up with a idea based on people’s wants and needs.
g. Apply your skills to a different field. Another
way to come up with a new product or service is to
use skills you’ve acquired elsewhere.
h. Write down all your ideas. Every idea, no
matter how small or how seemingly pointless, could
have value. Get into the habit of writing down every
idea you have in a notebook. Carry this with you at
all times, because you ever know when inspiration
could strike. This way all your ideas can be kept in
one convenient place. Open regularly and expand
what you have written down.
i. Foster your creativity. During brainstorming
period, you shouldn’t feel constrained. Instead, free
up your mind and see what you come up with.
- Take a walk. It helps stimulate brain activity, it
improves health and help you come up with idea
and don’t forget to bring your notebook.
- Explore stores. Visit or enter local stores, and take
note of the products you see.
What do they offer? What are there flaws? Also
notice of what you don’t see, as this will give you
an idea of what isn’t on the market that may be a
salable product.
- Talk to the people from diverse fields. Know how
they use the products or services to improve their
lives. This will help you think outside the box and
look and look at things from a different angle.
j. Take breaks. The brains often thinks up when
you’re not forcing it to. By taking a step back,
you’re letting your brain rest. Sometimes brilliant
ideas coming up from unexpected personal
activities like during shower.
k. Get plenty of sleep. In addition to taking breaks,
your brain sleep to stay fresh. Enough sleep keep
your brain working at its best. Always keep a pen
and paper near your bed. It’s possible to have a
breakthroughs or ideas in dreams.
2. EVALUATING YOUR IDEAS
a. Weight your Strengths and Weaknesses in
relation to your plan. Study your great idea if it is
realistic. Get rid of Unrealistic Goals for more
information on how you can get rid of goals and
ideas that are too far out of reach, and how to make
them more attainable.
b. Investigate if someone else has thought of it. It
is possible that someone has already done it, make
sure you do thorough research and find out if your
idea is truly original. Make use of the internet
search engines for your investigation if someone has
the business your are conceptualizing or inquiring to
related government offices for the lists of businesses
in the market.
c. Investigate your competition. Don’t panic if
someone has already come up with your idea.
Several businesses start in the market with several
competitors but still they mange to lead by
providing better service or product. Investigate you
competitor – be a customer of the competition, talk
to the competitors customers. And look at your
competitor’s online presence.
d. Pitch your idea to the family, friends, and
colleagues. Before investigating your potential
customers, consult with people who you know will
tell you the truth.
e. Talk to potential customers. After to a few
close friends, you need to go out and see if there is a
market for you. You can do these things: Conduct
interviews in person, send out surveys via email or
even social media.
f. Identify risks and obstacles. All business plans
include risks, either financial or personal. Several
obstacles will be encountered especially for a start
up business, get rid of those obstacles by:
a. Only work with people you trust,
b. always make sure you have enough financing
before continuing,
c. Be willing to change, and move on from failure.
g. Determine if you have a visible plan. Make a
final judgement on whether or not your plan is
viable. It could be viable taking consideration of
these components: Take into account all of the
interviewing and surveying you’ve done; What’s
your level of competition; Do a cost analysis of
your plan.
h. Rank your ideas. If you have several ideas, rank
them in order from best to worst
3. MAKING YOUR IDEA A REALITY
a. Choice your idea. After a careful evaluation you
should come up with one that is your best. By
choosing your best idea you focus your effort on it
and start implementing steps to make it a reality.
b. Decide your business structure. Sole
proprietorship, partnership or a corporation.
c. Develop a business plan. A business plan defines
your company, the service it provides, and projects
the company’s potential costs and earnings.
d. Find funding for your business. With out enough
capitalization to run the business, you need to seek
assistance from these sectors: Bank and private
investors