Year end stock valuation issues
- Thread starter Rob-Ed
- Start date
No, the profit(loss) was zero as you spent £10k but stock increased by £10k.
Simply buying in stock, to sell later, does not create a loss. All you are doing is moving "value" from one pot (the bank account) to another (stock).
RE-valuing stock will affect the profit (and hence CT) in the year it is revalued. If it's a classic and doubles in value then you end the year with £20k stock. That will lead to increased profit and CT.
I gave up taking anything from them seriously a long time ago, based on a few replies that I read in other threads.
Upvote
0
Upvote
0
When £1k of stock is bought, the following happens:
P&L:
Purchases increase by £1k
Closing stock increases by £1k
Cost of Sales remains unchanged
Gross profit remains unchanged
Operating profit remains unchanged
Balance sheet:
Stock increases by £1k
Bank balance reduces by £1k
Net effect in terms of CT is zero.
All that has happened is cash is converted to stock.
Upvote
0
read my original posts - it mentioned for sole trader and partnerships cash accounting can be used. The turnover limits have been relaxed from 6 April 24.
@B2 Bookkeeper has re-posted out of context
Posts 66-70
Upvote
0
The only entry on the P & L that links to the balance sheet is the retained profit after tax which is of course carried forward if no dividends have been paid; and cash in the bank.
In regard to the P&L If I buy £1,000 worth of plastic ducks at £1 each then my "cost of sales" = £1,000 - even if I don't sell any ducks! I might have sold other items and I will deduct £1,000 from my sales income to arrive at my profit. If I sell only 500 ducks at £5 each and nothing else then my profit = £1,500.
If I want to do it the OP's way then I can also say that my "costs of goods sold" is 500 x £1 = £500 and so my profit will be higher at £2,000.
Ultimately however once all the ducks are sold the tax man will end up with exactly the same CT based upon a profit from the ducks of £4,000.
The only difference in the two accounting methods is that if one accounts for the purchase in the year that they are purchased then one need not to lie awake at night wondering how many ducks are left in the stock room or whether their value has changed at the end of the year other than to assess the value of the stock for the balance sheet - and that's always going to be an assessment anyway.
If you base accounts on a "costs of goods sold" basis you will never get the bank account to reconcile. There might be a way to do it but I can't see an easy way to do it if one is not fully accounting for purchases.
Upvote
0
Every entry on the p&l has an opposite entry on the balance sheet. Every single one. If they weren't linked then the whole set of accounts would literally be useless.
This fundamental aspect of accountancy is the bit that you're not understanding.
And if the CT rate changes from one accounting year to the next? You wouldn't have the same CT.
The difference is one is cash basis accounting and the other is accruals accounting. Using cash basis you would have no stock on your balance sheet to value (the first example). Accruals basis is mandatory for incorporated entities (amongst others).
Yes your bank would 100% reconcile because either way (cash or accrual) you are always fully accounting for your purchases. This is the basic concept of double entry which you, with every bit of respect in the world, are showing you do not understand.
I debated whether to reply as I know you won't accept what I say but I thought it was important to explain the misconceptions should anyone else happen upon this thread. If anybody is in any doubt they only need to Google "double entry accounting", "cash Vs accruals" and "how to read financial statements".
Upvote
0
I understand that the P & L entries will be linked to the "cash in the bank" entry on the balance sheet because sales and expenditure will give you the closing bank balance at the end of the year. But if you don't account for your purchases of stock - say £100 - as "cost of sales" but only want to show "the costs of goods sold" which might be only £20 then how can you do that and reconcile the bank account?
If you can do that then I will take my hat off to you!
I still say that if a company buys £100 worth of stock but doesn't or can't sell any of it in the course of a year, then it has made a loss. It can't simply say that it has made no profit - and in the first years of most companies they do make a loss although they may be building up or developing stock to sell and are therefore converting their funds into stock which the company may believe has a value but which in reality nobody wishes to buy.
If your expenses are higher than your sales then you've made a loss - even if you believe that you've invested in valuable stock.
Upvote
0
Please see the other posts where this has been explained. It would be sitting as stock on your balance sheet
I can indeed do just that, along with every other experienced bookkeeper and accountant. This is the double entry concept that we've all been trying to explain to you.
You can continue to say whatever you wish but you are incorrect in your assessment of how accounting works. As has already been explained to you, your lack of understanding in relation to double entry and accruals accounting are where you are going wrong.
I did try and give you some slack in my first post as this accounting knowledge can be difficult to wrap your head around when you don't work with it on a daily basis but you can't keep saying that it's wrong just because you don't understand.
Upvote
0
Think we need to let Mulder & Scully loose on this one- the truth is out there you just need to look for it.
Here you go @Gyumri argue against the Open University "Introduction to Book-keeping & Accounting" study material.
www.open.edu
Here you go @Gyumri argue against the Open University "Introduction to Book-keeping & Accounting" study material.
Introduction to bookkeeping and accounting
Learn about the essential numerical skills required for accounting and bookkeeping. This free course, Introduction to bookkeeping and accounting, explains the fundamental rules of double-entry ...
Upvote
0
Try it out in your favourite accounts package.
Setup a pretend company with opening stock. Add a purchase for more stock. At that point your profit will be a loss, equal to the value of the stock value. Now imagine it's year end, you have sold nothing and enter the closing stock (i.e. opening stock plus your purchase). You have now broken even. No profit. No loss.
I may not have used the correct terms, but that's how it always works for me and my accountant.
Buying stock does not result in a loss.
Upvote
0
Let's use your example:
Bank account = 0
10 ducks opening stock @ £1 = £10
Bank account = - £10 (overdraft!)
Add purchase 5 ducks @ £1 = £5
bank account = - £15
Year End - sold nothing
Closing stock unsold = £15.
BANK BALANCE = - £15
Everything balances in accountancy jargon, BUT I have not just "broken even." Whilst it is correct to say I have "made no profit" - the reality is that I have bought a load of plastic ducks which I haven't sold and my bank balance = - £15 at the end of the year, whereas at the beginning it was zero.
I've therefore lost £15 which I now owe the bank. The balance sheet will show assets of 15 ducks less £15 owed to the bank so net current assets = £0
The P & L will show sales = £0 less expenses (or cost of sales whatever heading you want) of £15 = LOSS of £15.
Everything balances but it would be misleading to say that you haven't made a loss at that point in time after Year 1 of £15. You might sell some ducks in year 2 and start breaking into profit in year three.
This has nothing to do with double - entry bookkeeping but ensuring that you can give a fair view of the results of the year's trade.
"Did you make any money selling ducks?"
"No I didn't, and I 'm now in debt to the bank by £15" That's a LOSS! It's not a break even situation, which is where your sales have matched your expenditure.
Upvote
0
If you have 3 x £15 in your accounts then by definition your accounts do not balance.
It has everything to do with double entry. This is how you balance your accounts!
You haven't made a loss, you've converted cash (an asset) into stock (another asset).
Do you really not see that having an odd number of transactions can't work? We use debit and credit in accountancy terms but if you replace those with positive and negative it may make more sense.
You have a positive £15 in your stock and a negative £15 in your bank. If you then have an additional negative £15 in your profit and loss where is your additional positive?
Upvote
0
what if they have mated and you now have extra ducks or someone sneaked in a rubber duck amongst them when stock was counted.
Upvote
0
Did that open University Link on this subject make sense to you @Gyumri ?
It made sense to me but it might be harder to follow if you've always done it a different way.
https://www.open.edu/openlearn/mone...ookkeeping-and-accounting/content-section-3.5
It made sense to me but it might be harder to follow if you've always done it a different way.
https://www.open.edu/openlearn/mone...ookkeeping-and-accounting/content-section-3.5
Upvote
0
This thread is totally unbelievable! Never been involved with Ltd Company accounts, always a partnership. But my Dad in the 70s, had me counting all paper quantities at our printers and then explained the importance of the opening and closing stock. It really isn't that hard to understand . . . well, except for one person it seems.
Upvote
0
I have recently taken on a Client using Cash Basis Accounting and having now been researching the differences between Cash and Accruals I can see why there has been so much confusion on this thread.
As UK Contractor Accountant has already pointed out, Gyumri must be using Cash Basis Accounting.
Cash Basis Accounting is not relevant to the Original Post which was for a Limited Company.
But now that this is all clearer, what has transpired is that whilst Cash Basis Accounting does not report Debtors, Creditors or Stock, this means that the Balance Sheet should not have Stock included.
So, Gyumri, if you are indeed Self Employed and using Cash Basis then you might be correct about not having Stock on the P&L, but that would mean that you should not be reporting Stock on the Balance Sheet either.
As UK Contractor Accountant has already pointed out, Gyumri must be using Cash Basis Accounting.
Cash Basis Accounting is not relevant to the Original Post which was for a Limited Company.
But now that this is all clearer, what has transpired is that whilst Cash Basis Accounting does not report Debtors, Creditors or Stock, this means that the Balance Sheet should not have Stock included.
So, Gyumri, if you are indeed Self Employed and using Cash Basis then you might be correct about not having Stock on the P&L, but that would mean that you should not be reporting Stock on the Balance Sheet either.
Upvote
0
Latest Articles
-
What Carphone Warehouse, Microsoft and Uber Have in Common: They Started in a DownturnThere's a comforting myth that you need a booming economy to start...- Ozzy
- Updated:
-
What Makes a Small Business Actually Sellable?There's a question that a lot of small business owners never think to...
- Ozzy
- Updated:
-
Why Your Team Keeps Asking the Same Questions (And What to Actually Do About It)Every small business owner knows the moment. You're halfway through...
- Ozzy
- Updated:
-
At What Point Do Courier Losses Just Become a Cost of Doing Business?If you sell physical products online, you already know the feeling. You...
- Ozzy
- Updated:
-
What I Wish I'd Known Before Using AI in My BusinessSomewhere between the headlines promising AI will transform everything...
- Ozzy
- Updated: