Differences Between Trading and Manufacturing Concerns
This article outlines the differences between trading and manufacturing concerns.
Nature of Purchases
Trading Concern: These businesses purchase merchandise in a ready shape to be sold. For example, a furniture dealer purchases furniture from a manufacturer and sells it to customers without additional processing.
Manufacturing Concern: Manufacturing institutions use labor and machinery to convert materials into finished goods. For example, a furniture manufacturer converts wood and other materials into finished furniture after applying labor.
Nature of Inventories
Trading Concern: Opening and closing inventories are only of one type (i.e., merchandise in trade).
Manufacturing Concern: Opening and closing inventories are of three types (i.e., raw- materials, work-in-process, and finished goods).
Trading Concern: Given that trading concerns do not produce anything, the accumulation of accounting data relevant to production processes is not needed in these organizations.
Manufacturing Concern: Accounting procedures provide for the accumulation of accounting data identified with production processes.
Determination of Sale Price
Trading Concern: No extra ledgers (e.g., factory ledgers) are needed.
Manufacturing Concern: Additional ledger accounts are required.
Trading Concern: Only roll acquaintance is prepared because problems such as manufacturing-related issues do not arise.
Manufacturing Concern: Wages and salaries are paid to workers in production and office workers, and so separate payrolls are prepared because the cost of the production department is charged to the manufacturing cost and wages and salaries of office workers are charged to selling and administration costs.
Also, a separate payroll is prepared for direct labor and indirect labor.
Trading Concern: It does not matter whether intangible assets are recorded. In most cases, it is preferred not to record intangible assets.
Manufacturing Concern: Intangible assets (e.g., cost incurred on research, patents, designs, and experiments) must be recorded and considered when calculating unit cost.
Costs and Expenses
Trading Concern: No distinction is made between costs and expenses.
Manufacturing Concern: A clear distinction is made between costs and expenses.
Trading Concern: The fixed assets used in trading concerns are smaller in number compared to manufacturing concerns. Usually, no separate ledger is maintained for fixed assets.
Manufacturing Concern: The number of fixed assets used in manufacturing organizations is large, and so a separate ledger is maintained for them.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.