I have no idea how to account for this at all! My husband has set up a business where he does after dinner speaking and runs workshops in schools about Rockets and Rocketry as a hobby. In order to create business he builds and launches rockets which are not for resale and would be an asset to the business.
As he builds these rockets from scratch, he purchases raw materials but the resulting asset has a much higher value than the raw materials purchased to create them. I'm assuming that the raw materials purchased will be treated as a capital expenditure but how do I account for the added value to the asset after it has undergone the production process?
To make things more complicated he also makes rockets / rocket components for people so some raw materials purchased need to be accounted for in inventory / cost of sales.
I hope that makes some sort of sense - if anyone has any suggestions or advice it would be greatly appreciated!
If you bought a computer, you would bring it in at cost to the balance sheet, and so I think the same must be done for the rockets that are not resold. I would suggest keeping a note of the parts that attribute to each rocket, perhaps a sheet for each rocket in excel, so if one ever was ever to be sold, you would know what disposal cost to show, for that particular item. I suppose an important question would be - after the first launch, are they re-usable?
Regards added value, if your husband intends to take a proper wage, you could post his hourly rate as a labour charge to the asset, rather than to the profit and loss, but that might be difficult if he is a sole trader and as such wont take a wage. If I buy a computer and I spend time setting it up, I don't account for that on the balance sheet, so I cant see that being an issue. What will happen is, he will just appear to make more profit on disposal, in the year of sale. And in that year, he may take more for himself due to that increased cashflow.
With the parts that are sold, you would bring them in as materials on the profit and loss, and take a separate stock take at the year end. This is easier if you set up something that you update as you go along, assuming you have lots of parts.
-- Edited by FoxAccountancyServices on Saturday 31st of October 2015 01:45:32 PM
The rockets are indeed re-usuable. The business is set up as a sole trader so there is no proper wage that I could charge to the asset.
I guess my biggest concern is that if I account for just the purchased materials as the asset, it does not give a true reflection on the balance sheet as to the company value as the value of the rockets at point of disposal would be significantly higher than the value of the individual compononents used to make them. For example, £500 of raw materials can easily be worth £1,500 once it has been 'manufactured' into an actul rocket.
I hope that makes some sort of sense?
Thanks for your input on this - I've just been going round and round in circles with it!
I guess it depends on what you are trying to achieve? As a sole trader, you don't file any accounts with companies house or HMRC? From a tax point of view, nothing will change.
Its true that the sale price will be higher than the value of the asset at disposal, as it will have been depreciated at that point, too. But the same could be said for a computer... after 3 years it could be £1 on the balance sheet but then you sell it for £20.
