Working Out Profits Which Method To Use

[Thunderchild]

Right, I'm a sole trader, mostly trade on ebay. I keep a record of each sale but I'm looking to simplifiy my record keeping as well as not end up in a position where i declare profits I've not exactly made.

So I buy my stock and for each transaction my spread sheet works out the profit and costs in that sale and the whole lot is tallied up so I know total in, total spent on post etc (just got a franking machine so makes that one easier) total profit.

So my profit is calculated on each sale, cost of item sold to me and the profit from that transaction. Over all though I've not made a profit until most of the stock is sold which it has not and I'm constantly buying more as soon as I can afford to to diversify.

So how do i calculate ? Do i work out the cost to me of the item and profit on each sale and each month and tally it up for the year, or do i take total receipes and subtract total expenditures. If i do the latter do i need to keep other records like stock records to show that the stock is really sitting on the shelf and that I'm not buying stuff for myself "on the company". Or does this not kick in until i have a certain turnover ? I know that at the day job stock taking is a serious thing for them and they get audits but then they turn over £13M a year not a couple of thousand.

I do have all records to show either way. The other thing is i have sold stock that was bought prior to me starting in business, so would I have to write that off only what I used for myself prior to starting the business ?( I sell electronic parts that I also use as a hobbiest).

[buildersmate]

Well, one way to avoid 'declaring profits I've not exactly made' is the write the stock off as you buy it and only show it as contributing to profit if and when it is sold.

You clearly know something about stock valuation in commercial/industry because of your job. Businesses have to do that (stock taking) because 'stock' contributes massively to justifing the value of the organisation and the profit is created when some (hopefully ALL) of that stock is sold for more money than the value put in (through its original purchase and any added-value from processing it - you're a Distributor, so this last bit doesn't really apply to your business).

If you are a sole trader and you are essentially saying to HMRC, 'look I've bought this and sold that, spending xyz in the process. That leaves this amount, all of which I've taken out of the business (an income)'. You could start off like that and it sure would depress your net income - because you'd be building up 'stock' that you'd be recording as having zero value.

Its not the way you can continue to do it for long because you are going to have to start producing a simple profit-loss and balance sheet at some time if the business grows - and in doing that you are going to have a value unsold stock (perhaps at its cost price) so that your business holds a sum of work-in-progress stock. In that profit / loss statement, you'd show (to HMRC) that you have had net 'drawings' - i.e. your income taken out the business - on which you pay personal income tax.

[Thunderchild]

Thank you for your answer.

So ultimately I will need to keep a record of stock so that I can justify where the money went after showing profit based on "money in" - "money out", or is the fact that the invoices are for the goods I am selling so that is obviously what the money was spent on. Is there a Turnover threshold at which point this becomes important ?

What I'm trying to avoid is for the last tax year in which I was in business from november to april paying tax on "profits" for the sales without taking into account the fact that the "profits" at the moment have only paid for the rest of the stock that is still left on the shelf

[magsmay]

BAsically you need an Input spreadsheet ( stock and expenses directly linked to selling your product -don't forget to add a % of your utility bills if you work from home.) and an Output spreadsheet - recording everything you sell. You will also need a Capital Asset sheet - everything that helps you in business -including your PC and Vehicle if you use one for your business -these should be added as you get Tax relief on depreciation on Capital Assets.When you fill in your business tax return there will be sections where you can put 'stock in hand' -stuff you've paid for (inputs) but not yet sold (outputs). the stock you had before you started in business will, I believe, be classed as capital input . If you use anything for personal use there is a section in your Tax return to put the sum total in so really everything you've asked about is addressed by filling in your Return .

[Thunderchild]

ah that sounds great, I thought they'd just want me to declare profits