Profit&loss, stock and taxation

No. Closing stock has already been allowed for when calculating the cost of goods sold. The idea is that this year's closing stock will contribute to reducing the taxable profit of *next* year's accounts, so it cannot also do the same *this* year.

Suppose you started the year with 5k worth of stock and ended with 10k, having purchased 20k worth during the year. Then (ignoring trivia like carriage in and returns out) the cost of goods sold equals:

Opening stock (5k) plus purchases (20k) minus closing stock (10k) which amounts to 15k. If your sales were 40k and overhead expenses 5k, this would make your gross trading profit 25k and your taxable profit 20k.

The increase in stock would typically be balanced by a corresponding increase in your capital account, but these are balance sheet items and have no bearing on taxable profit.

Thanks for that. Just to clarify, is this not the case then:

40k sales-5k overheads5k-purchases 20k (15k*cost of the 40k sales*+5k)k net taxable profit? TIA

In message , zeb writes

No

it should be

40k (sales) - £15k (cost of sales) = £25k less £5k overheads = £20k net taxable profit.

You seem to have the overheads in twice.

Thanks. No, I have the overheads in once only. Note purchases during the year's trading are 20k, i.e 15k (cost price of the 40k sales) plus 5k of purchases not yet sold. Z

In message , zeb writes

Ok, it was the two £5ks that fooled me. Your mistake is putting the unsold stock in the calculation. It shouldnt be there, it is irrelevant. Unsold stock is a balance sheet entry and does not appear in the P&L other than part of the calculation for determining the cost of goods sold.

No.

By the way, it is confusing if you subtract the overheads first. It is convention to do them last. First you work out the trading profit, then you deduct the overheads to arrive at net taxable profit.

Trading profit is (broadly) sales minus cost of goods sold. If you started the year with no stock at all, and purchased 20k worth and had 5k worth left over, then the CGS is indeed 15k, and with sales of 40k that makes the trading profit 25k. The 5k of closing stock then plays no further role in the current year's accounts. All you deduct is the 5k overheads and this makes the taxable profit 20k.

NEXT YEAR, if you again sell 15k worth of stock for 40k, but plan your purchasing more carefully, buying in only 10k worth and selling that plus the opening stock of 5k brought forward from this year, so that you have zero stock left at the end, then the CGS will again be

15k, and your trading profit will again be 25k, despite having spent only half as much on purchases as this year.