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VAT on Stock

19th Jan 2012
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A common question asked by both students and colleagues alike is "Does stocks have VAT?" 

Stock in this form, refers to stock held by companies to sell on, rather than stock market shares, which is what comes up when you try to Google stock.  The definition of stock as per SSAP 9 is: Stock is stated at the total of the lower of cost or net realisable value of the separable items of stock or groups of similar items. (Per IAS 2, the definition remains the same but with stock being replaced with inventories.)

Generally, if a client is VAT registered, then any items that are posted to the profit and loss account is exclusive of VAT.  It follows therefore, that the closing stock posted in the profit and loss account does not have VAT and the corresponding figure in the balance sheet, also does not have VAT.  In the preparation of the year end accounts, you may need to request the closing stock figure from the client. This will always be net of VAT.   If the client is not VAT registered then it is more straight forward.  The stock figure, as well as all the other figures in the profit and loss account, would be stated at gross. In other words, you ignore the effect of VAT.

So the next question that normally follows is, "What happens to the VAT on the stock?"

The VAT on stock is accounted for when the stock is purchased. It is reflected in the creditors control account in the balance sheet but only the net purchase figure is shown in the profit and loss account.

Finally, once you have the closing stock figure, the journal that you would need to post in the accounts is as follows:

Dr Stock in the balance sheet                         10

 Cr Closing stock in the profit and loss          10

This would be reflected in the accounts as follows:

In the profit and loss account:

Opening stock

Purchases

Closing stock                       10

In the balance sheet

Bank

Stock                                   10

Debtors

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