I would think that this means that I made a loss of £103 and have stock to the value of £3404, so have to pay no tax.
But my accountant deducted the closing stock value from the expenditure (£10967-£3404=£7563), then deducted this from the turnover (£10864-£7563=£3301). Which means that I would have to pay tax on £3301.
I don't understand how could I have made a profit of more than 3K when my expenses were more than my turnover.
Profit is calculated as Sales - Stock Movement in the year - expenses. So because you have unsold stock left, even though you paid for it in the year it's not deductable as an expense.
The reason for this is you haven't sold the stock to generate the sales income.
It's a common mistake to assume expenditure is allowable in the year it is made.
But - you're accountant should have explained all this to you.
Edit: In next years accounts your purchases will be £3,404 (opening stock) + purchases - next years closing stock.
-- Edited by ADAS on Sunday 5th of September 2010 03:22:52 PM
-- Edited by ADAS on Sunday 5th of September 2010 03:23:56 PM
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
It is because this stock you have on hand will be sold next year and not this year. Someone more knowledgeable will come along and explain about matching purchases and sales to their respective years. You haven't actually sold this stock yet. It is an asset on your balance sheet.
Next year this figure will be added to the purchases (as it will then be opening stock). I would imagine the "purchases" figure is not actually £10967 but this is the total of all expenditure (wages, heating, insurance, motor expenses etc). So I have assumed for the sake of the example below the expenses come to £4967 and the purchase of stock for re-selling is £6000.
Sales
10,864.00
Purchases
6,000.00
Add opening stock
0.00
6,000.00
Less closing stock
3,404.00
Cost of goods sold
2,596.00
Gross Profit
8,268.00
Expenses (listed)
4,967.00
Net Profit
3,301.00
I see while I am in the middle of editing this it has already been answered but I am in full flow now.
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Never buy black socks from a normal shop. They shaft you every time.
So do I understand correctly that the more stock I have, the more tax I'm likely to pay?
Not really,
The more you sell, the more tax you will pay. You effectively only pay tax on your stock / purchases once you've turned them into sales.
I think one of the most difficult concepts for new business owners to understand is the difference between cashflow and profit/ loss.
Tony.
Edit:
In Peasies eg in order to earn £10,864 in sales, you only needed to use £2,596 worth of your purchases. Therefore you'd pay tax on £8,268 (ignoring expenses for now).
Then next year if you spend another £6000 but sold out completely, you might earn £18,000 but you'd only pay tax on £8.596. £18000 - 6000 - 3404 (stock bought fwd)
-- Edited by ADAS on Sunday 5th of September 2010 04:09:42 PM
-- Edited by ADAS on Sunday 5th of September 2010 04:13:04 PM
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
Tell me about it! I find it really difficult to get my head around all this accounting stuff!
By the way, my turnover comes from not only the price of the products I sell but also the postage I charge customers.
So for example if I sell something for £10+£3.49 postage, I just write this down as £13.49 turnover, but don't account for what monies came from stock or postage seperately.
That's fine with regards to postage and stock sold.
You can split it if you wish but if you are not vat registered then its not too much of an issue. I assume you use royal mail so there isn't any vat of the postage cost anyway to nothing to worry about.
Don't forget that your postage cost not only covers the cost of the stamps or recorded delivery etc.. But it also covers the cost of packaging which I assume you include in your Direct Costs as both Carriage (for the postal costs) and Packaging for the...well packaging.
If you are VAT registered, you will need to charge your customers VAT ontop of the delivery charges; even though Royal Mail doesn't charge you VAT for delivering the goods.
Hi, 
