Help please understanding Stock value with regards corporation tax. What am I missing here ?
Business turnover ( funds in) 90K
Costs ( stock plus packaging costs) 100K
Net loss -10K
Less expenses ( wages, postage etc) 20K
Total net loss -30K
Stock value at day 1 is zero ( new business)
Stock value at end of year is 60K
Directors loan ( funds placed into business from director, with which stock has been bought to setup the business ) 60K
Profit and loss account would be turnover of 100K, less costs of sales (stock at day1 + purchases, less stock at yr end = 0+100-60K = 40K), less expenses of 20K – leaves an ‘operating profit’ of 40K. (there is no 40K in the bank, its just stock on shelves)
BUT in reality the net loss is -30K
So what is the Corporation tax Due ???
My take is its a net loss of -30K ( no corp tax due) and this is carried over to next year?
Interested to know the definite answer to this… but my understanding is that Corporation tax is paid on profits and there isn’t any as we are in a net loss currently… operating profit doesn’t count yet once the stock sells it will.
I would say you are correct, it would be due probably when it sells as the price can change before then however I am not a registered accountant or bookkeeper.
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thanks for the replies. I did use one of the quickfile option accountants…
I am at a loss. he has replied saying i pay corp tax on ‘operating profit’ so basically paying for stock sitting in my warehouse…
so if you start out first year, buy a huge amount of stock to start a business and dont sell it all in same year - you pay corp tax on it…just does not make sense…
The stock sitting in your warehouse isn’t an expense, it’s an asset. If it were a single large item of capital investment then you might be able to claim AIA on it in one year, but if it’s stock in trade then my understanding is that it only becomes an expense when it is sold.
I see it as turnover is £90 k
Cost of sales is £100k less stock not yet sold of 60k = net cost of £40k
Gross profit = 90k less 40k …£ 50k
Overheads are £20k
Net Profit £ 30k
Corp tax @19% = £5,700
Directors loan is nothing to do with profits and is money owed back to the directors payable as and when cashflow allows.
You pay corporation tax on the profits you make during the financial year. The money you spend on assets such as equipment, stock, etc. doesn’t come into the equation. Your profit for tax purposes is the income from sales less the cost of those goods that you sold. The cost of the goods will be the price you paid for those items, plus any additional costs making them ready for sale. You then also take off any general running costs of the business, i.e. overheads. Any expenditure on assets plus money that you owe to suppliers or is owed by customers, is held in the balance sheet and doesn’t affect your profit and loss account.
Stock that is purchased should initially be coded into code 1001 as an Asset.
As you sell the goods, the cost should be transferred from 1001 Stock to 5000 General Purchases (or Cost of Sales as it is often called).
How often you make the adjustment is up to you. It has to be done at your year end to correctly reflect the profit on goods SOLD. Unsold goods remain in Stock as an Asset.
Making the adjustment MONTHLY will give you a better indication of your ongoing profitability.
That’s one way to do it, but an easier way is to code it to general purchases in the first place, then at year end use the opening and closing stock nominals to make the adjustment - journal debit opening stock and credit stock for the stock you held at the start of the year, and debit stock and credit closing stock for the stock you held at the end of the year, which will give you the correct cost of sales for the year as a whole (what you started with plus what you bought minus what you’ve got left).
If you want to do intermediate stock takes you can journal those in the same way to get an accurate cost of sales mid-year.
Thanks all! replies much appreciated, been a quick learning curve for me this past week. as per Bagpipe and Cbstephensaca, whilst there was a ‘net loss’ due to buying loads of stock in first year, figures for the years corp tax are based on turnover less Cost of Sales, less expenses. Proves profitability which is always good
