A former car salesman has decided to start a part-time motor trade business - buying, fixing up and selling vintage cars.
In the process he starts by using family savings to buy half a dozen vehicles and parts. However, the business doesn't take off as quickly as he had hoped and at the end of the tax year he'll have several unsold cars. Whilst he's made a small profit margin from the sale of a couple of cars, he hasn't recouped the money he'd initially invested and hence not taken any personal drawings.
1. Would the P&L show a net loss?
2. Would the unsold cars be considered an expense on a P&L statement?
3. How would he account for using interest-free family savings to finance the start up?
Many thanks for your input.
Replies (9)
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Assuming you're not on some cash accounting option, it isn't in your P+L. It's taken out and put on your Balance Sheet.
Your accountant will sort it out for you.
Accruals Accounting
Stock is valued at the lower of cost and NRV.
One would only reduce the carrying value of stock below cost, on a line by line basis, if it was considered that the amount realisable for each car was less than the amount paid.
General points
From the nature of your questions you are not an accountant, depreciation has no place re stock held for resale.
Subject to the amounts involved there are also possible vat implications here.
In summary, as advised above, you really ought to speak to an accountant
You don't depreciate stock but you can revalue it if the net realisable value falls below cost, the difference would go to the P&L.
It sounds like this former car salesman ought to engage an accountant, this is basic stuff and important to get right.
I was thinking more of the everyday sense of the word, rather than the technical accounting definition.
ie it is possible that stock lessens in value.