Accounting Question

fionahanrahan · 09-12-2006 5:00pm #1

Hey, i was wonder could anyone help me. Im new to this accounting business and i need an important question answered.

"Why is an amount for "closing stock" included in both the trading account and on the balance sheet when finalising accounts?"

It would be great if someone could answer my question!

kluivert · 09-12-2006 6:04pm

Prudence & Matching Concept - same principle as Debtors and Creditors.

The determination of profit for an accounting period involves the allocation of costs to reporting periods. As part of this process, the cost of unsold or unconsumed stocks is, to the extent that it is believed to be recoverable and carried forward until the period in which the stock is sold or consumed.

Thus the profit is shown in the profit and loss account under cost of sales, the remaining balance is shown at the lower of cost or net realisable value in the balance sheet.

Double Entry:

Cr: Closing Stock (P & L) 100.00
Db: Closing Stock ( Bal Sheet) 100.00

Check out SSAP 9 Stock and Long Term Contracts for further information.

http://www.frc.org.uk/asb/technical/standards/pub0397.html

fionahanrahan · 09-12-2006 6:14pm

thank you so much for taking the time to answer my question. Very helpful and much appreciated.

Robbie Fowler · 10-12-2006 2:44pm

Hi i am starting my own business doing electrical services,Could someone please explain to me the difference between a C2 and a c35 as i don't know which i need.I have been reading up on c2 but it seems like i need to have a contract got for work,the problem here is i don't have a big contract with a builder im more doing private work for people ie..house re wires,new house wiring, extra sockets showers etc etc so im not actually a sub contractor..
Am i making sense??

kluivert · 10-12-2006 4:13pm

More of a tax question rather accounting

The only difference is the adminsitration of the payment.

You must apply for a C2 from your local tax district, normal you must have all your tax returns to date and on time - income tax, vat & paye & RCT.

If you have a C2 then the contractor will pay you 100% of the final invoice (or amount that is owed to you).

If you dont have a C2, then the contractor will pay you 65% of the amount, and give you a C45 cert for the other 35%.

He pays the 35% to the Revenue.

You send your C45 Cert into the Revenue, and they send you out a cheque for the 35%.

If you register for Vat on a cash receipt basis then you must account for the vat when you receive the money, ie 65% and then 35% or 100% receipt.

I hope that clears that up, if you need any more advice you me a buzz.

Robbie Fowler · 10-12-2006 6:13pm

So which should i go for? as i said i will be working for just ordinary homeowners and farmers etc im not sub contracting myself into a builder or anything

kluivert · 11-12-2006 10:03am

Apply for a C2 and save all the hassle of going down the C45 route.

Its a simple answer really, which would you prefer 100% of the payment up front, or get 65% upfront and 35% within 2 months. Think about cashflow.

If you working as a principle contractor for homeowners and farmers etc then C2 etc does not apply, Relevant Contractors Tax (RCT) only applies if you are a sub contractor working for a contractor.

Finally, it helps getting a C2, as it implies that you keep your tax affairs up to date and larger companies will rather work with you knowing this.

ircoha · 11-12-2006 9:58pm

kluivert wrote:

Prudence & Matching Concept - same principle as Debtors and Creditors.

The determination of profit for an accounting period involves the allocation of costs to reporting periods. As part of this process, the cost of unsold or unconsumed stocks is, to the extent that it is believed to be recoverable and carried forward until the period in which the stock is sold or consumed.

Thus the profit is shown in the profit and loss account under cost of sales, the remaining balance is shown at the lower of cost or net realisable value in the balance sheet.

Double Entry:

Cr: Closing Stock (P & L) 100.00
Db: Closing Stock ( Bal Sheet) 100.00

Check out SSAP 9 Stock and Long Term Contracts for further information.

http://www.frc.org.uk/asb/technical/standards/pub0397.html

Dont understand what is meant by the profit is shown ....and the remaining balance....
How do we have a remaining balance of profit?

kluivert · 12-12-2006 10:15am

ircoha wrote:

Dont understand what is meant by the profit is shown ....and the remaining balance....
How do we have a remaining balance of profit?

Sorry my explainations may not be the best at times.

The balances of stock whether opening or closing are included in the trading account, along with purchases. Otherwise known as the Cost of Sales.

Accounting principles say you match revenue with cost and therefore when an item of stock is sold the profit from it can be determined in the gross profit margin. Sales proceeds - Cost of Item.

Any items of cost not sold in the period is included as an asset under closing stock and carried forward till the item has been sold. An asset is something that provide an economic benefit in the future.

Therefore the company reflects the profit from the sale of stock in the current period in the trading account and the balance of unsold stock is included as an asset is the balance sheet to be carried forward till it is sold.

I hope that helps.

Kinetic^ · 12-12-2006 10:42am

Purchased 100 elephants druing the year.

80 elephants are sold.

So you're left with 20 elephants which is your closing stock.

Even though you purchased them this year, the 20 leftover elephants can't be put into your trading account for this year as it would not give a true and fair view of your trading for the year.

To take them out, they're deducted as closing stock. Do due to them being credited from your trading account, a debit must happen. The corresponding debit is to add them as stock to your current assets in your balance sheet.

This may make it easier to understand.......it may not. Just thought I'd take a less technical approach as understanding double entry is quite hard at first.

kluivert · 12-12-2006 10:52am

Thats it you hit the nail on the head.

Thanks.

Kinetic^ · 12-12-2006 11:07am

kluivert wrote:

Thats it you hit the nail on the head.

Thanks.

No bother, didn't want to be seen to be undermining you but alot of the people that will be on won't have an accounting background. So explaining things the technical way will just baffle them further. I feel that talking in quantity of elephants will help everyone

kluivert · 12-12-2006 11:11am

I think ill use the elephants examples from now on

That way people will never forget.

Kinetic^ · 12-12-2006 11:44am

kluivert wrote:

I think ill use the elephants examples from now on That way people will never forget.

Just for the record, I don't condone this sort of thing

Robbie Fowler · 13-12-2006 12:06am

So if i wasn't too get a C2 just yet how do i pay tax on what i earn i don't wanna be caught doing anything illegal
Sorry about all the silly questions im sure they are simple answers but i don't know anything about this area

kluivert · 14-12-2006 12:46pm

Robbie Fowler wrote:

So if i wasn't too get a C2 just yet how do i pay tax on what i earn i don't wanna be caught doing anything illegal
Sorry about all the silly questions im sure they are simple answers but i don't know anything about this area

At least your asking questions and learning.

Income tax is based on income received - minus relevant expenses (profit), you will receive 100% of a job whether you have a C2 or not, its just a matter of how you received it that is the issue as outlined above

You will need make to make an Income Tax return each year. This is done on the 31st October of each year.

This way you will be taxed on any profits you earn in one year, not on your income.

So if you have a year end of 31st December 2006, this means that any profits made from 1st January 2006 - 31st December 2006, will be taxed and payable by 31st October 2007. Your year end is a date in which your accounts are made up to, this is normally a 12 month period.

Your Profit and Loss account will show your income from contracts minus any expenses incurred, such as materials, sub contractors, wages etc.

Have you been trading long?

It might also be advised that you seek advice from an accountant that you know and get them to prepare your books and records, accounts and income tax returns and vat returns if necessary.

Theres plenty around here, just send a PM to me if you require further help.

Robbie Fowler · 05-01-2007 6:28pm

If i start my own buisness and register for vat returns,do i still have to pay tax on everything i earn or is charging the vat to the customer on the incoive the same as me paying tax?

kluivert · 06-01-2007 3:13pm

Robbie Fowler wrote:

If i start my own buisness and register for vat returns,do i still have to pay tax on everything i earn or is charging the vat to the customer on the incoive the same as me paying tax?

Yes you still have to pay income tax on profits you earn.

Vat is Value Added Tax, a vat on goods and services that the end customers pays and you collect on behalf of the Revenue and pay to the Revenue.

Income Tax and Vat are two seperate issues.

FAS are running Start a business course now that would be recommended.

Robbie Fowler · 07-01-2007 2:51am

cheers i appreciate this,i suppose i seem like i don't know what im doing but im a much better electrician than tax expert as i said i know nothing about that sort of thing

Accounting Question

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