I have a new customer whose business is renting domestic goods. Their previous bookkeeper has set up the accounting system (Quick Books) so the cost of all items purchased is added to stock value in the balance sheet and the balancing entries being creditors and purchase VAT.
When an item is rented the stock value in the balance sheet is reduced. The stock is rented not sold. The cost of these purchases never hits the P & L.
I have dealt with rentals before for the party who is renting. Never for the owner of goods renting to another party.
Has anyone had experience of this situation? Your advice would be appreciated.
Replies (32)
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Agree Peter
I would treat them as fixed assets and revalue annually,
If you are a book-keeper the hire charge is simply Income the double entry.bank/cash .
i would have thought
I would treat them as fixed assets and revalue annually,
If you are a book-keeper the hire charge is simply Income the double entry.bank/cash .
That if the business is the rental of goods that the items rented are trading stock. Happy to be proved wrong though.
MtF
How were they bought?
At the moment you say the cost is in stock with the other side being creditors and purchase VAT.
This does not make sense, so it needs looking at.
Your current situation suggests that the 'stock' has not been paid for yet, and that the bookkeeping is wrong.
The cost of the domestic goods (net of VAT) should be debited to fixed assets, the input tax should be debited to a VAT account, and the gross invoice value (goods + VAT) should be credited to creditors.
When the supplier of the 'stock' is paid the entry is debit creditors, and credit bank account.
It is also uncertain from your post whether you are operating a 'cash' system or a 'credit' system. The fact that you are using a creditors account suggests that you have a credit system.
You need to ensure that you do not mix systems.
Sorry but
They are not stock - they are fixed assets.
The posting of 'debit stock' & 'credit creditors' is not correct.
Sorry again
My previous post 'crossed'.
Hopefully you now realise that the bookkeeping is wrong.
straightforward
They are fixed assets.
Assuming that the goods are rented out without somebody to operate the equipment, then they are only eligible for writing down allowances.
I'd love to see the tax computations that have been done!
EDIT: but see Portia's correcting post below.
No!
Assuming that the goods are rented out without somebody to operate the equipment, then they are only eligible for writing down allowances.
They are eligible for AIA. It is only FYAs that you cannot claim on assets held for leasing.
thank you
Assuming that the goods are rented out without somebody to operate the equipment, then they are only eligible for writing down allowances.
They are eligible for AIA. It is only FYAs that you cannot claim on assets held for leasing.
Yes, I forgot that.
Fixed Assets
I have dealt with accounts were equipment is bought then rented out.
Case one = fork lift trucks.
Case two = televisions and video recorders.
In both clients' cases capitalised as fixed assets.
Being fixed assets capital allowances were claimed.
Ask the accountant
I think you have enough confirmation that the accounting is wrong so you can ask the accountant.
Some accountants just prepare accounts as quickly as possible to get their fees. Obviously I'm not saying this accountant does that but it's possible.
The answer
is in your first post.
You speak with the accountants and say that you do not understand why the system has been the way it was, because your understanding is that the equipment should be treated as fixed assets, not stock.
The ball is then in their court to explain why it is the way it is/why you are wrong.
The longer you leave it, the more difficult it will become.
Accounting policies
You are into accounting policy treatment - so should be directed by the accountants.
But 'yes' depreciation is charged to P&L,
Any further diminution in value should be measured, but how often is the question. Unless you are preparing periodic management accounts (which I doubt) it should be done as at the accounting year end.
Under normal circumstances CAs will be claimed, but again this is the accountants' province.
Same answer
I am required to produce periodic management accounts.
Speak to the accountants.
There is one further point
what the bookkeeper enters into QuickBooks isn't necessarily (is rarely?) what the accountant puts into the annual accounts!!
This thought occurs as I am putting together a set of accounts from QuickBooks where the bookkeeper doesn't worry too much whether her postings are to P&L accounts or BS accounts - she still balances.
Other qualities
what the bookkeeper enters into QuickBooks isn't necessarily (is rarely?) what the accountant puts into the annual accounts!!
This thought occurs as I am putting together a set of accounts from QuickBooks where the bookkeeper doesn't worry too much whether her postings are to P&L accounts or BS accounts - she still balances.
They need a new Bookkeeper.
We can cope with the bookkeeping imperfections as she is very good in all the other areas of her job.
Are you?
what the bookkeeper enters into QuickBooks isn't necessarily (is rarely?) what the accountant puts into the annual accounts!!
This thought occurs as I am putting together a set of accounts from QuickBooks where the bookkeeper doesn't worry too much whether her postings are to P&L accounts or BS accounts - she still balances.
They need a new Bookkeeper.
Are you angling for that job as well!? :-)
Capital allowances were certainly claimed in the case of the company hiring out Fork Lift Trucks.
Regarding the TV / video recorded rental company I didn't deal with the tax side for that client so can't say, but I can see no reason why capital allowances would not have been claimed.
Regarding the way forward:
The end-of-year tax accountants should deal with the Capital Allowances claims where appropriate and provide some guidance on the month by month depreciation amounts (ie. they should recommend an annual depreciation rate which divided by 12 can be journalled each month).
In the cases that I dealt with revaluation was not carried out since a reasonably accurate or adequate depreciation rate was used. Goods coming back off hire in poor condition would have had one of the following options applied:
Sold at market value when coming off hireCompensation claimed off customer to whom the goods were hired if it was clear that damage had been caused by the customer
In the case of the TV/Video rental outfit the depreciation rate chosen was fairly high due to risks associated with techonlogical development of such consumer goods.
Please expand
Definite attitude problem!
On your comment.
I suspect that only you are brilliant at all aspects of your job.
No need to reply
Definite attitude problem!
On your comment.
I suspect that only you are brilliant at all aspects of your job.
I have been drawn into these nonsensical exchanges before.
Not the only one
Sorry to hijack your thread but I have recently taken on a client from an accountant who passed away. Literally started work properly on this yesterday. Guess what... the same thing.
He purchases electrical goods for hire by customers. These have been treated as purchases and any amounts he holds on his person (in his can or at his premises) has been treated as closing stock.
None of these have been treated as assets and I have no-body to go back to. The wife of the previous accountant has simply passed on the working papers to each client and said sorry you need to find yourself a new accountant. The working papers do not show any major adjustments in respect of these assets.
Now I can correct the current year and possibly re-state the previous year but how far do I realistically go back?
How brave are you?
The MD has a mentor, unpaid, not an accountant, IT background. Who claims to have a lot of experience of dealing with systems for rental companies and is saying I am wrong and the many rental companies where she has implemented systems have all treated goods purchased for rental as stock.
Perhaps you should suggest that she is always wrong, so it doesn't really matter whether it was once or many times that she has implemented the system.
It does seem odd, though, that none of the external accountants have picked up on it.
I suspect that
you have done as much as you can.
If you have a good relationship with the new accountants then discuss it with them once they have been appointed.