In it, the consensus seems to be that goods taken for a sole proprietor's own use are credited to the Purchases ledger (not the Sales ledger as the original poster had first thought) and debited to Drawings.
Limited companies are only discussed by implication, but again it seems to be the general view that goods taken by the director/s for their own use are a reduction of stock and that recording them as a sale would give a false representation of profits.
So far, so good, but (you knew there was a "but" coming, didn't you?) again and again I read on the net stern statements that the tax authorities demand that goods taken by the proprietors are to be recorded as being bought at the full sales price. For instance here:
(There seems to be a softer view taken on food eaten by the staff at restaurants and so on, but I'm not talking about food in my case).
So, how do I treat non-food goods taken by the director of a ltd company for his own use? I assume I debit Director's Loan the full sales price including VAT. Should I then credit the Purchases account the normal net sales price of the goods? That feels very odd, when all the debits on the Purchases account are at cost price!
Or is it different for limited companies, and in their case the director just buys the goods like any other customer, i.e. debit Director's Loan, credit Sales and VAT on Sales. That's what I originally intended to do, until I read that thread from April that I linked to above.
And what about VAT? I have to credit some account for the VAT - but is it Purchases VAT or Sales VAT?
What you suggest is what I originally planned to do. It would certainly ensure the full amount of VAT was paid - but wouldn't crediting Sales mean that the final sales and profit on the P&L account were overstated, hence not giving a true picture of how the business was doing? Several people on the earlier thread suggested that was why Sales could not be the account credited.
Why would crediting the sales overstate the accounts? Effectively when taking goods for own use the director is selling to himself and given the ltd company is a separate legal entity then the fair value should be the full market value.
Could understand the argument to put through the sale at cost price and thus show a £nil gain or loss but the sale would still be credited to the sales account.
At the end of the day goods taken by the director should be relatively immaterial and therefore should not have a material effect on the profit and loss account however it is treated.
I hope you don't think I'm being awkward and arguing for the sake of it, but I am just trying to truly get my head round why it seems to be different in this situation for a limited company than for a sole trader or partnership (i.e. the book Accounting Skills by Margaret Nicholson mentioned in the earlier thread says to credit Purchases not Sales for goods taken for own use.)
You mention the company being a separate legal entity. Would you say that that is the key point?
Or do you take the view that Ms Wilkinson has the wrong approach, and it should be Sales in both the case of a ltd company and also in any other type of business?
One thing I am gradually learning from this forum is that (shock horror!) bookkeeping contains quite a few grey areas and matters open to different interpretations.
You mention the company being a separate legal entity. Would you say that that is the key point?
Hi
It might help to think of a separate legal entity as an "artificial person". When a person forms a Limited company, they basically "create" another "person" that is distinct from it's shareholders. The Artificial person exists in it's own right.
I appreciate it can be confusing when the shareholder, is a also the director of a limited company (often referred to as an owner-managed company), but the legal distinction is clear.
If J Smith forms a company, say, J Smith Ltd. Then if J Smith takes goods from J Smith Ltd (the artificial person) it's no different than if they bought the same goods at eg Tescos.
A Sole Trader / Partnership doesn't have the same legal personality i.e. neither trading form creates an "artificial person".
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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.
Yes the key point is that the limited company is a separate legal entity.
As a sole trader the sole trader cant sell to himself and show a profit (as that would be artificially inflating profits so any goods for own use should be taken at cost and probably credited to purchases.)
However as the ltd company is a separate legal entity then any sales to to the owner should be shown as any sale to a 3rd party (ie included in sales and at market value).
Thanks again, Tony and Mark for your patient explanations. I now feel able to enter the various debits and credits without a mental hesitation hanging over me, if you know what I mean.
