Stock gifted to charity - what is correct accounting treatment

Stock gifted to charity - what is correct...

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What is the correct accounting treatment for stock gifted to charity ?

Should the transaction be accounted for as a sale (turnover) or is it correct to deduct the costs of the goods from cost of sales ?

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By Portia Nina Levin
02nd Jan 2015 18:56

It is not a sale

Goods purchased (or manufactured) have, after the fact, proved to have been purchased (or manufactured) otherwise than for sale.

The precise bookkeeping entries will depend on what the previous bookkeeping entries were, but should reflect the fact that some of the costs that have been incurred have been incurred for the purposes of making a donation of goods to charity.

There! Sounds so obvious when you say it out loud.

And yes. There probablly is tax relief, but the facts you have offered are rather sparse.

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By L Haldane
02nd Jan 2015 19:39

Thank you.

You have confirmed what I believed to be correct, that journal Dr Donations Cr Purchases for the cost value of goods (stock items) donated to charity is the correct accounting treatment. 

Just wanted to get a second opinion as the previous accountant (large multi-office firm) has accounted for same transaction in prior year as Dr Donations Cr Sales for the sales value of the goods donated

 

 

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By frankfx
03rd Jan 2015 20:55

Perhaps the multi office firm was correct

If you check hmrc guidance then you will be aware of the VAT implications. And the accounting treatment required, and the possibility of improving the tax and vat outcome for the client  business 

For modest amounts one may not be unduly concerned. 

But the hmrc vat guidance does show you the range of possible outcomes, only we in the UK seem capable of producing endless variations on a theme. 

A Knowledgeable

vat compliance officer  could catch you out. 

Ps 

If the amounts involved are significant would you amend prior year tax returns, assuming that you follow your new treatment. 

Also is the client going to question your new treatment , assuming he is alert to the transaction accounting . 

He may have incurred fees to ascertain the previous treatment. To ensure that he was tax and vat compliant 

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By L Haldane
03rd Jan 2015 23:53

Thank you for your input but I have already checked the VAT & tax implications for the case in hand which involved a donation of stock items for the charity to sell on (I appreciate I didn't make this clear in my original posting).

See :

www.gov.uk/tax-limited-company-gives-to-charity/equipment-and-trading-stock

which reads as follows: 

 

If your company donates its trading stock to a charity or CASC, you don’t have to include anything in your sales income for the value of the gift. So you can deduct the full cost of the items from your total business profits before you pay tax.

If your company is VAT-registered, you’ll need to account for VAT on the items you give away.

However, you can apply zero VAT to the items - even if you normally charge the standard or reduced rate - if your company makes the donation specifically so that the charity can:

sell the items, hire out the items, export the items

This means you can reclaim the VAT on the cost of the trading stock you donate.

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