Accounting – 5.1 Sole traders | e-Consult
5.1 Sole traders (1 questions)
A trading business is involved in the buying and selling of goods. The core activity is the purchase of inventory, which is then resold to customers for a profit. The primary source of revenue is the gross profit, which is calculated as the selling price minus the cost of goods sold (COGS). A trading business holds stock of goods. Examples include a retail shop, a supermarket, or an electronics store.
A service business, on the other hand, provides intangible services to customers. There is no physical product being sold; instead, customers pay for expertise, labor, or a specific activity. The cost associated with a service business is typically the direct cost of providing the service (e.g., wages of employees, materials used directly in the service). Revenue is generated from the fees charged for the service provided. Examples include a hair salon, a legal firm, or a consultancy.
Here's a table summarizing the key differences:
| Feature | Trading Business | Service Business | |
| Nature of Product | Tangible goods | Intangible services | |
| Cost of Goods Sold (COGS) | Direct cost of purchasing goods | Direct cost of providing the service (e.g., wages, materials) | |
| Primary Revenue Source | Gross Profit (selling price - COGS) | Fees charged for the service |