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← Chapter 1 · Introduction to Accounting
In these notes · Types of Businesses
1.1Roles of Accounting and Accountants1.2Stakeholders and Their Decision Needs1.3Types of Businesses1.4Forms of Business OwnershipChapter Summary
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1.3

Types of Businesses

Key Concepts

There are two main types of businesses:

Trading BusinessService Business
What it doesBuys goods from suppliers and sells goods to customersProvides services to customers
Revenue earnedSales revenueService fee revenue
Has Inventory?YesNo
Has Cost of sales?YesNo
ExamplesBookstore, supermarket, hardware shopTuition agency, consultancy firm, photography studio

Note: Inventory is the goods a business holds, ready to sell. Cost of sales is the cost of the goods the business sold during the period — what it paid to acquire those goods from suppliers.

The key distinguishing feature is the main source of revenue. If the business:

  • earns mainly from selling physical goods → trading business (it will have inventory and cost of sales);
  • earns mainly from providing a service → service business.

What if a business does both? Classify by what it mainly does. For example, Ravi runs a grocery shop but also rents out a small corner of the shop to a fruit vendor. His primary income is still from selling groceries — so his business is a trading business, even though he also earns some rental income.

Cher
How to Remember

Ask: "Does this business sell physical goods to customers?"

  • Yes → Trading business (has inventory, has cost of sales)
  • No → Service business (no inventory, no cost of sales)

Watch out: A delivery business does not sell goods — it provides a delivery service. The goods belong to someone else.

Worked Example
Scenario: Firefly Traders sells electronic components and gadgets to walk-in customers. Blue Kite Photography takes and edits photos for clients at events and earns a photography fee.

Classify each business as trading or service, and justify your answer.

Firefly Traders
Type: Trading business.
Reason: It buys electronic goods from suppliers and sells them to customers. It holds inventory and earns sales revenue from the sale of goods.

Blue Kite Photography
Type: Service business.
Reason: It provides photography services to clients and earns service fee revenue. It does not sell physical goods to customers and does not hold inventory.

Common Mistakes
1

Classifying a delivery business as a trading business. A delivery business provides a service — it does not own or sell the goods it delivers. It earns service fee revenue, not sales revenue.

2

Forgetting to give a reason when asked. The question usually asks you to "name the type and explain your reason." The reason must refer to whether the business sells physical goods (inventory) or provides a service.

3

Confusing "selling food" with "providing a food delivery service."

  • A hawker stall that sells food to customers is a trading business.
  • A food delivery platform that only transports food for others is a service business.
Check Your Understanding
Kaya & Whisk Bakery sells cakes and pastries to walk-in customers. What type of business is this?
Reveal answerHide answer
Trading business — it buys baked goods (inventory) and sells physical goods to customers, earning sales revenue.
Bytes & Brains IT Services repairs laptops and earns repair fees. What type of business is this?
Reveal answerHide answer
Service business — it provides IT repair services to customers and does not sell physical goods.
What is the key accounting difference between a trading and a service business?
Reveal answerHide answer
A trading business has inventory and cost of sales; a service business has neither.