Forum Message

End of Year Stock & Owner's Capital?

Hi,
I've had you account software for around 18 months, and have been inputting figures into it throughout. I am trying to pull together all the info. I need to submit my Jan 31st tax return, and have a couple of questions.

  1. The stock I buy to resell represents a significant asset of the company, yet it sits on the end of year P&L only as a loss. Is it only seen as an asset if, or when, the business is closed?

  2. Also, I have been marking expenditures such as fuel, postage, and purchase of further stock against Owner's Capital, as there is no capital available from Sales Income and I have been using my own money for this. Will this sit on the accounts as money always owed to me? Would I be able to claim this back against the remaining assets and stock, if I ceased trading in years to come?

I have very much enjoyed playing with your software, it's incredibly versatile, thank-you!


Posted by Stuart Golledge on Jan 3, 2012 3:52 PM GMT

Hi Stuart,

Glad to hear you like Solar Accounts!

  1. I assume that when you purchased the stock you allocated the purchase to the 'Cost of Goods Sold' account. If this is the case, then you should record a General Transaction dated at the end of the financial year which transfers money from the 'Cost of Goods Sold' account to an 'Inventory' asset account. See this page for details:
    http://www.solaraccounts.co.uk/help/how-to-track-changes-in-stock-level.php

  2. Yes, if you are self-employed and make payments with your own funds then you should set the Paid From Account to 'Owners Capital'. When you cease trading you can claim back the value of all assets (including stock) less any liabilities (such as bank loans). The total Equity balance represents this amount owed to the business owner.

Regards,


Posted by Mark McLaren (Solar Accounts) on Jan 4, 2012 9:48 AM GMT

Thanks, Mark,

So, that now has my remaining stock at Year End sat under Assets in the new Inventory tab, and the net value of the stock I've sold still remaining under Expenses in Direct Costs, which has everything looking exactly as it should on the P&L and Balance Sheet, when set for 5th April.

The only problem is, the 'SOLD stock' value continues on in the Direct Costs for this year's trading, which obviously gives a false indicator, as this is actually a Direct Cost for the previous year's trading. If I create a general transaction equalling the total net stock value for the whole of the previous year (including stock sold), instead of just the stock value on hand, then this obviously gives me a false inventory stock figure.

I'm sure it's something very simple, but it's the last thing to be fathomed, and I just cannot get my head around it! Is there any way you can explain it in a way that I can understand?

Also, would it be normal to just keep last year's closing stock in the inventory, or would it normally be transferred back into 'direct costs,' say on the 6th April, for the same process to be carried out at the next Year End?

Sorry to be making such a simple procedure so complex.

Many thanks in advance for any help,

Stuart


Posted by Stuart Golledge on Jan 4, 2012 12:44 PM GMT

Hi Stuart,

Once you have entered all the transactions for the financial year click menu Setup > Financial Year > Start a new financial year. This will create an end-of-year transaction that resets the balance of all the income and expense accounts to zero (including the Cost of Goods Sold account).

Regards,


Posted by Mark McLaren (Solar Accounts) on Jan 4, 2012 12:53 PM GMT

Superb, thanks, Mark,

it couldn't have been simpler than that, I was scared to ask the question, it felt so complicated.

Can I just follow-up with one more query? After changing the financial year, I now have a figure in the 'retained earnings,' which is an EOY Adjustment. This figure doesn't match the Net Income of the previous year, which is what I would have expected? I have never drawn an income from the business, but have reinvested it in stock.

Best wishes, and thanks,

Stuart


Posted by Stuart Golledge on Jan 4, 2012 2:04 PM GMT

Hi Stuart,

That is odd - the increase in Retained Earnings would usually be the net profit for that year. Please try this: click menu Setup > Financial Year > Revert to previous financial year. Then go to the Accounts list and check that the opening balance for each income and expense account is zero.

If that doesn't help, please click menu File > Backup, then save the backup file and email it to me - this will give me a better understanding of the problem.

Cheers,


Posted by Mark McLaren (Solar Accounts) on Jan 5, 2012 8:07 AM GMT

Hi Mark,

I think I've got myself confused here, I'm stupidly forgetting the difference between Tax Year and the Financial Year, really sorry (wood from the trees kind of thing!). I've realised expenses marked against 'owner's capital' are now taken from the 'retained earnings' (now there are some), rather than being added to the 'owners capital' as a credit.

Can I just finish up with something much simpler?

  1. When the new financial year has been activated, do any extra inputted figures (as long as the date is set to fall in the previous period, namely for me, between 06/04/11 - 11/05/11 [my financial year start date] ) still get correctly allocated? Or do I need to input all my figures up to 11th May 2011 before resetting the financial year?

  2. Would I also be correct in thinking that when I enter my tax bill into the accounts it will be deducted from 'retained earnings,' unless I have already used that up in purchasing stock with 'owner's capital,' in which case it would then 'CREDIT' the owner's capital?

  3. With the net stock value that I added to 'inventory' on 5th April for tax reporting purposes, is it now just a simple matter of moving the value of that figure back and forth to reflect the true value of stock held? Namely, if I sell 100 stock items, and I have a negative stock value in 'expenses' (ie I've sold some of the stock that's sat in 'inventory'), would I then transfer the funds back from inventory into the 'direct costs' pot to get true reports?

I think that's me done! Thank-you SO much for your patient help, I really hope you make a great deal of money from all your endeavours.

Kind regards and best wishes,

Stuart


Posted by Stuart Golledge on Jan 6, 2012 1:19 PM GMT

Hi Stuart,

Isn't the tax year the same as your financial year? That is, if you are self employed I would expect that you only need to produce reports for 06/04/11 to 05/04/12. Why do you want to produce a report which starts on 11/05/11?

To answer your questions:

  1. If you want to make changes to the previous financial year click menu Setup > Financial Year > Revert to previous year. Then add your transaction dated in that year, then click menu Setup > Financial Year > Start a new financial year. In this way the opening balance of the income and expense accounts will all be zero.

  2. If you are self-employed then your tax bill is considered a personal expense, not a business expense. If you pay it from a business account, record a non-business payment as described here:
    http://www.solaraccounts.co.uk/help/how-to-record-non-business-payments.php

  3. Yes, you should record an adjustment between 'Inventory' and 'Cost of Goods Sold' at the end of each period to reflect how much of inventory remains. See the last two transactions on this page for examples:
    http://www.solaraccounts.co.uk/help/how-to-track-changes-in-stock-level.php

Regards,


Posted by Mark McLaren (Solar Accounts) on Jan 6, 2012 6:02 PM GMT

Hi Mark,

in response to:
"Isn't the tax year the same as your financial year? That is, if you are self employed I would expect that you only need to produce reports for 06/04/11 to 05/04/12. Why do you want to produce a report which starts on 11/05/11?"

...I started the business on the 11th May 2010, so the software has recorded this as my financial year. Is there a way of changing the dates, so that when I reset the EOY, it sets the accounts back to zero on the 6th April? Otherwise I guess it will zero any figures inputted between April 6th 2011 and 11th May 2011, which is obviously no good. I have not yet inputted that much from my hard copies for this 2011/2012 tax year, as I'm only just coming to grips with the software.

Also, you said: "If you are self-employed then your tax bill is considered a personal expense, not a business expense."
...I wondered about this because my net profit from 2010/2011, which I'll obviously be taxed on, has been added in full to 'retained earnings' (I never drew a salary, I just reinvested most of the profit in extra stock), which is now being used up by purchases/bills that are marked against 'owner's capital'. Shouldn't the 'retained earnings' figure be representative of my taxed net profit as, in reality, there will not be that gross net figure in existence. It feels as though I will be taxed on the taxable portion of it twice!
If you know where I'm coming from on this, but feel this point would be too difficult to clarify, please feel free to tell me to trust you on it, and that it works out exactly as it should in the end. I just can't follow the logic on this one, though I could trust it exists.

Sorry, Mark, to be a nuisance, I desperately want to grasp the backbones of this software and the book-keeping process, and it would be so difficult to direct these questions to someone who wasn't intimate with both things.

Kind regards,
Stuart


Posted by Stuart Golledge on Jan 6, 2012 10:39 PM GMT

Hi Stuart,


Although you started the business on 11/05/10, you should set the first financial year to start on 06/04/10. To do this click menu Setup > Financial Year > Revert to the previous financial year, and repeat until you no longer see the 'revert' option. Then select 'Edit the current financial year' and set the New Start Date to 06/04/10.


2.
The convention is to structure your accounts along legal lines. Legally, you are personally responsible for paying tax, not the business, so the convention is for the Retained Earnings figure to be based on the gross tax figure. However, the accounts are ultimately just a tool to help you understand the financial situation of the business - if you find it more logical to treat the tax payments as a business expense you can do so.

Note that with either approach the net effect on the total Equity (ie. net assets belonging to the business owner) is the same. If you treat the tax payment as a business expense it will reduce the Retained Earnings balance. If you treat it as a non-business payment it will reduce the 'Owners Drawings and Personal Use' balance. Both are equity accounts so will reduce the total Equity balance by the same amount.

Regards,


Posted by Mark McLaren (Solar Accounts) on Jan 8, 2012 9:04 AM GMT

Hi Mark,
Sorry for the late message of thanks, this really is a great product and after care service.
Wishing you every future success.
Kind regards and best wishes,
Stuart


Posted by Stuart Golledge on Jan 14, 2012 9:42 AM GMT