Manufacturing means to make a product, whether by hand or by machine or both.
The word manufacture originates from Latin manu facere meaning "make by hand" (manus = "hand" and facere = "to make").
Unlike trading businesses, manufacturing businesses do not buy products at a low price and sell at a higher price.
Instead manufacturing businesses make products, which they then sell.
In this tutorial I'm going to show you one of the primary differences when accounting for manufacturing businesses (instead of service or trading businesses). This difference can be seen in the income statement.
A Quick Review of Trading Businesses
Okay, let's recap. Here is the income statement for a trading business (including the calculation of the cost of goods sold):
We can see that the cost of the goods sold was determined as follows:
The formula above was based on the calculation of the value of closing inventories:
The Income Statement Format for a Manufacturing Business (Multiple Step)
The income statement for a manufacturing business is a bit different to that of a trading business:
As you can see, the income statement for a manufacturing business is a multiple-step income statement, meaning that there are multiple sections or categories for income or expenses.
The initial section of Sales, Cost of Goods Sold and Gross Profit is one separate step in this multiple-step income statement.