From: Ronald Raygun 
Subject: Re: Profit&loss, stock and taxation
Newsgroups: uk.finance
Date: Fri, 02 Jun 2006 21:36:38 GMT

zeb wrote:

> Thanks for that.  Just to clarify, is this not the case then:
> 
> 40k sales-5k overheads=35k-purchases 20k (15k*cost of the 40k
> sales*+5k)=15k net taxable profit?  TIA

No.

By the way, it is confusing if you subtract the overheads first.  It
is convention to do them last.  First you work out the trading profit,
then you deduct the overheads to arrive at net taxable profit.

Trading profit is (broadly) sales minus cost of goods sold.
If you started the year with no stock at all, and purchased 20k
worth and had 5k worth left over, then the CGS is indeed 15k, and
with sales of 40k that makes the trading profit 25k.  The 5k of
closing stock then plays no further role in the current year's
accounts.  All you deduct is the 5k overheads and this makes the
taxable profit 20k.

NEXT YEAR, if you again sell 15k worth of stock for 40k, but plan
your purchasing more carefully, buying in only 10k worth and selling
that plus the opening stock of 5k brought forward from this year, so
that you have zero stock left at the end, then the CGS will again be
15k, and your trading profit will again be 25k, despite having spent
only half as much on purchases as this year.