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Year end stock valuation issues

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Gyumri said:
Please don't tell the tax man that!

Your costs of sales in any particular financial period is what you have paid out to manufacture or purchase the goods that you intend to sell - irrespective of whether you actually sell any goods.

That is why many companies make a loss in their first years of business - they have spent more on acquiring or producing goods than they are able to sell.

If cost of sales simply means costs of goods sold as you say, then no company would ever make a loss in selling goods.

The OP's question is about valuing his stock and believes that the value of his stock will somehow impact upon the CT he may have to pay.

I have said that however he wishes to value his stock or whatever it is deemed to be worth, is totally irrelevant to CT.

Using an example given above of a company buying a car for £10,000 - the value of that car whilst it remains as unsold stock might have diminished or increased in value by the time it is sold - but that value has no bearing on what CT will be paid when the car is sold. CT will be determined solely by the profit if any made on the sale.
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There are none so blind as those that will not see.

I'm out
 
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Gyumri said:
The correct answer is your first statement: you made a loss of £10,000 in year 1 which you can carry forward to year 2. In year 2 you made a profit of £15,000 which you can set against your loss made in Year 1 = £5,000 taxable profit.
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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).

Gyumri said:
Using an example given above of a company buying a car for £10,000 - the value of that car whilst it remains as unsold stock might have diminished or increased in value by the time it is sold - but that value has no bearing on what CT will be paid when the car is sold. CT will be determined solely by the profit if any made on the sale.
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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.

NortonBishop said:
Does anyone here read his / her comments and believe them to be true on this subject?
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I gave up taking anything from them seriously a long time ago, based on a few replies that I read in other threads.
 
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UK Contractor Accountant said:
HMRC have scrapped the turnover limit for operating the cash basis so as mentioned above taxpayers sitting on a rather hefty taxable profit for the year can just plough a fair chunk of the profits into stock on the last day of the financial year and avoid paying large tax bills.

Adds a whole new dimension on tax planning and stock levels at year end - if you are into the higher rates of tax, for example, you might just invest enough in stocks to bring your taxable profits down to the basic rate tax threshold.

At some stage it will unwind when you have to release those stocks back for resale and bring stock levels back down.
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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.
 
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B2 Bookkeeper said:
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.
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It doesnt for cash accounting.
 
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UK Contractor Accountant said:
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.
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Yes, but there's no need to introduce cash accounting again, when the OP is not a sole trader and gave no indication they were a partnership.
 
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NortonBishop said:
I think there were bigger misunderstandings than that - eg, "the p&l isn't linked to the balance sheet"
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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.
 
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@Gyumri Now address the OPs question. A few years down the line you need to revalue the remaining duck stock. What does that do to profit and CT calculation for that period?
 
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Gyumri said:
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.
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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.
Gyumri said:
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.
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And if the CT rate changes from one accounting year to the next? You wouldn't have the same CT.
Gyumri said:
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.
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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).
Gyumri said:
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.
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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".
 
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Ziggy2024 said:
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.
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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.
 
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Gyumri said:
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?
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Please see the other posts where this has been explained. It would be sitting as stock on your balance sheet
Gyumri said:
If you can do that then I will take my hat off to you!
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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.
Gyumri said:
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.
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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.
 
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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

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 ...
www.open.edu www.open.edu
 
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Gyumri said:
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.

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.
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Do you not think that being the only one arguing against everyone else telling you that you are wrong, means anything?

You haven't answered my question: Do you actually run a business?
 
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Gyumri said:
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.
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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.
 
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DontAsk said:
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.
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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.
 
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Gyumri said:
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.
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If you have 3 x £15 in your accounts then by definition your accounts do not balance.
Gyumri said:
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.
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It has everything to do with double entry. This is how you balance your accounts!
Gyumri said:
"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.
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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?
 
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Gyumri said:
"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.
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It's not a loss as you have stock valued at £15.

Back to the OPs question about stock valuation. If in the next period, ducks are worthless and the NRV for your stock is zero, THEN you have made a loss.
 
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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.
 
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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.
 
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B2 Bookkeeper said:
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.
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I'll have a read of the links provided above - maybe i've been paying too much tax over the years.
 
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