When it gets to your financial year end chances are you will have:
- Raw materials waiting to be turned into something beautiful;
- Products that you are part way through making (work in progress);
- Stock ready to be sold; and
- Money on account for custom orders.
These all count as stock and if you are using the accruals basis for accounting then you need to do a stock take. The process will give you your Cost of Sales figure used when working out your taxable profits.
To calculate the Cost of Sales:
Opening stock (zero for new business or value at end of last year for existing businesses)
PLUS stock you have bought during the financial year
LESS stock left at the end of the year
EQUALS Cost of Sales
There are rules for valuing stock and work in progress. More detailed information can be found here http://www.hmrc.gov.uk/manuals/bimmanual/BIM33000.htm
Don’t forget you also have to take into account any stock that you have used, given as presents etc. There is a box on the tax return called “Goods and Services for your own use”.
Whichever method of accounting you are using it is useful for your business to understand how much you have bought and sold throughout the year. Therefore even if you don't need to do a stock take for your year end accounts it is recommended that you periodically undertake one as it provides useful information on the operation of your business. You may be surprised at what materials you have bought and what you have actually been using.
This is just a very brief explanation of whether you need to do a stock take and how to work out your cost of sales. For more detailed guidance and assistance get in touch now .
If you are using the new Cash Basis there will be more information in my next blog post but if you want more information before then contact us.