If you are not VAT registered then the VAT is part of the cost of sale as the price of the goods purchased is effectively increased by the amount of VAT.
If you had been VAT registered then VAT would not have been part of the cost of sale as you are merely collecting VAT on behalf of the government.
Call me pedantic (many do) but in the second paragraph you say expense but stock is actually a direct cost so I would refer to it as a cost of sale rather than an expense.
The question in relation to duty is seperate to the one related to VAT (especially in this instance where the business is not registered for VAT).
Whether duty should be included in the accounts as a cost of sales or a period cost causes a lot of debate. My view is that the duty is part of the cost of sale as, per SSAP9 / IAS2, all costs incurred in bringing the asset to the location and condition for intended use are deemed to be part of the cost of the asset (stock being an asset used for trading).
Conclusion.
VAT and Duty would be part of the cost of the inventory in this instance.... But the accountant that you are dealing with for this client may adopt the alternate approach of the duty being a period cost. (who said that there's only one way to skin a cat) so best to check how the accountant wants to treat the duty. (But VAT is part of the cost).
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Wearing my cost accountant's hat from many years ago, I think some of this is a practical issue. It's quite a job to get an accurate cost of stock when there's the purchase price, plus duty, freight charges and maybe other direct costs too. That's why in quite a big company we used standard costs, calculated to include the expected cost of all these elements, and occasionally revised, and wrote off the variance to actual cost in the month of purchase. Great if you've got the time or are dealing with large amounts of money, or are rather sad or nerdy(!), but not so good in a small business with limited resources.
However, not doing it accurately and including all these costs could give a distorted impression of how the business is performing. But then I'm interested in producing accounts that help people run their business, and keeping the taxman off their back is just a necessary evil that has to be dealt with too!!!!
and thats where the long standing arguement over how to treat these costs comes in.
The fact is that the inclusion of VAT would only give a distorted view of profits if there was some likelihood of the business becoming VAT registered which would basically render comparatives useless for a year.
For non VAT registered businesses the issue could be perceived the other way around in that to not include VAT as a cost of sale is the elemenet that gives a distorted impression of actual cost.
There are strong arguements in both directions with perhaps the best approach being to seperate but include as a seperate cost of sales item rather than treating as a period cost. Basically breaking down cost of sales an extra step for completeness which pretty much future proofs the recording of VAT inclusive transactions.
I may not agree with you but understand your point as like yourself I come from a background on the management rather than financial accounting side of the fence (which explains why I get so annoyed at a certain professional bodies use of statistics as I come from a background of them being my main weapon of choice if you want to convince someone that the world is really flat).
To my mind this is a scenario where we are both right... Or both wrong depending on whether you're a cup half full or half empty sort of person.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
That depends on whether what you're selling is just the cup, or if the contents are part of the product .
lol
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
.
