A simple question probably: if net retail trading profits for the year (sales
less cost of purchasing the sold items less overheads/expenses) are, say,
20,000ukp but stock levels during the period has increased by 5,000ukp is the
net taxable income 15,000ukp? TIA
zeb wrote:
> A simple question probably: if net retail trading profits for the year
> (sales less cost of purchasing the sold items less overheads/expenses)
> are, say, 20,000ukp but stock levels during the period has increased by
> 5,000ukp is the net taxable income 15,000ukp? TIA
No. Closing stock has already been allowed for when calculating the
cost of goods sold. The idea is that this year's closing stock will
contribute to reducing the taxable profit of *next* year's accounts,
so it cannot also do the same *this* year.
Suppose you started the year with 5k worth of stock and ended with 10k,
having purchased 20k worth during the year. Then (ignoring trivia like
carriage in and returns out) the cost of goods sold equals:
Opening stock (5k) plus purchases (20k) minus closing stock (10k) which
amounts to 15k. If your sales were 40k and overhead expenses 5k, this
would make your gross trading profit 25k and your taxable profit 20k.
The increase in stock would typically be balanced by a corresponding
increase in your capital account, but these are balance sheet items and
have no bearing on taxable profit.
In article <8ISfg.79719$>,
says...
>
>zeb wrote:
>
>> A simple question probably: if net retail trading profits for the year
>> (sales less cost of purchasing the sold items less overheads/expenses)
>> are, say, 20,000ukp but stock levels during the period has increased by
>> 5,000ukp is the net taxable income 15,000ukp? TIA
>
>No. Closing stock has already been allowed for when calculating the
>cost of goods sold. The idea is that this year's closing stock will
>contribute to reducing the taxable profit of *next* year's accounts,
>so it cannot also do the same *this* year.
>
>Suppose you started the year with 5k worth of stock and ended with 10k,
>having purchased 20k worth during the year. Then (ignoring trivia like
>carriage in and returns out) the cost of goods sold equals:
>
>Opening stock (5k) plus purchases (20k) minus closing stock (10k) which
>amounts to 15k. If your sales were 40k and overhead expenses 5k, this
>would make your gross trading profit 25k and your taxable profit 20k.
>
>The increase in stock would typically be balanced by a corresponding
>increase in your capital account, but these are balance sheet items and
>have no bearing on taxable profit.
>
Thanks for that. Just to clarify, is this not the case then:
40k sales-5k overheads=35k-purchases 20k (15k*cost of the 40k sales*+5k)=15k
net taxable profit? TIA
In message <> writes
>Thanks for that. Just to clarify, is this not the case then:
>
>40k sales-5k overheads=35k-purchases 20k (15k*cost of the 40k sales*+5k)=15k
>net taxable profit? TIA
>
No
it should be
40k (sales) - £15k (cost of sales) = £25k less £5k overheads = £20k net
taxable profit.
You seem to have the overheads in twice.
--
John Boyle
In article <>,
says...
>
>In message <> writes
>>Thanks for that. Just to clarify, is this not the case then:
>>
>>40k sales-5k overheads=35k-purchases 20k (15k*cost of the 40k sales*+5k)=15k
>>net taxable profit? TIA
>>
>No
>
>it should be
>
>40k (sales) - £15k (cost of sales) = £25k less £5k overheads = £20k net
>taxable profit.
>
>You seem to have the overheads in twice.
>--
>John Boyle
Thanks. No, I have the overheads in once only. Note purchases during the
year's trading are 20k, i.e 15k (cost price of the 40k sales) plus 5k of
purchases not yet sold. Z
In message <> writes
>
>Thanks. No, I have the overheads in once only. Note purchases during the
>year's trading are 20k, i.e 15k (cost price of the 40k sales) plus 5k of
>purchases not yet sold. Z
>
Ok, it was the two £5ks that fooled me. Your mistake is putting the
unsold stock in the calculation. It shouldnt be there, it is irrelevant.
Unsold stock is a balance sheet entry and does not appear in the P&L
other than part of the calculation for determining the cost of goods
sold.
--
John Boyle
zeb wrote:
> Thanks for that. Just to clarify, is this not the case then:
>
> 40k sales-5k overheads=35k-purchases 20k (15k*cost of the 40k
> sales*+5k)=15k net taxable profit? TIA
No.
By the way, it is confusing if you subtract the overheads first. It
is convention to do them last. First you work out the trading profit,
then you deduct the overheads to arrive at net taxable profit.
Trading profit is (broadly) sales minus cost of goods sold.
If you started the year with no stock at all, and purchased 20k
worth and had 5k worth left over, then the CGS is indeed 15k, and
with sales of 40k that makes the trading profit 25k. The 5k of
closing stock then plays no further role in the current year's
accounts. All you deduct is the 5k overheads and this makes the
taxable profit 20k.
NEXT YEAR, if you again sell 15k worth of stock for 40k, but plan
your purchasing more carefully, buying in only 10k worth and selling
that plus the opening stock of 5k brought forward from this year, so
that you have zero stock left at the end, then the CGS will again be
15k, and your trading profit will again be 25k, despite having spent
only half as much on purchases as this year.