“I run an e-commerce website as a limited company and my year end is 31 March. I will have quite a lot of un-sold stock at year end , some of which probably has minimal re-sale value – will I need to account for this stock in some way in my accounts / tax return? At the moment all of our purchases just go straight to the profit and loss account as a cost of sale.”

FreeAgent Accountants

As a limited company the year-end accounts should present a true and fair view of the state of the business for the period. As such a valuation of stock (where it has a material effect on the accounts) should be calculated and shown within the report. A stock-take where this is the case is strongly recommended.

For example, a company makes total sales of £100,000 in the year whilst through the same period purchases £100,000 of stock of which £50,000 remains unsold at the end of the year.

If we were to not show a valuation of year end stock and all purchases went straight to the profit and loss the position shown would be the following:

stock1

Clearly the above example would show a distorted view of the company position for the year as it does not take into account the £50,000 that is yet to be sold. In the scenario above (assuming the remaining stock is still worth £50,000 at the year-end) purchases would be adjusted to reflect the closing stock valuation of £50,000 – this being the actual purchase costs of the stock sold and therefore the gross profit will be £50,000.

The difficulty arises in actually valuing the year end stock. You state that some of the items remaining at 31 March have a minimal re-sale value. In order to comply with accounting standards stock should be valued at the lower of either cost or net realisable value – meaning future potential selling price. As such it is worth going through stock items on a line by-line basis to determine their actual value.

Below are a couple of basic stock valuation examples:

  • An item of stock is purchased for £100 & its re-sale value at the year-end is considered to be £200. The valuation of this item of stock in the accounts should be £100 (being the lower of the cost price and expected resale value).
  • If the same piece of stock mentioned above is considered to have a resale value of £50 (given it has either become obsolescent/ damaged in some way or the market conditions have changed) at the year-end then it should be reflected as £50 in the stock valuation.

If we take point 2 above and extrapolate that all stock has been written down by 50% in our initial example it would produce the following result:

stock2

As you can see the stock valuation has reduced profits by the amount we have written the stock down by – in this example the stock has been written down from £50,000 to £25,000 and the loss of this is felt in the current year.

Stock can be an area that is very subjective in a set of accounts and requires judgement from the directors. If you are in any doubt whatsoever as how to calculate or value your stock then we recommend you seek our advice.