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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4350
Experience:  FCCA FCMA CGMA ACIS
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I run a property development/civil engineering business, my

Customer Question

I run a property development/civil engineering business, my accountant is currently preparing our year end accounts.
Within the tax year being prepared, a farm has been purchased with the intention of developing and dividing the property and selling them on at a later date (hopefully at a profit).
At the moment, within the draft accounts the farm is included within the cost of sales as a purchase but then is shown again as a negative for the same value as closing stock. It is also shown in the current assets as stock.
My previous understanding was that I could just show it as a cost of sale in the same way plant/materials etc are shown and the value of the farm would appear as part of sales in future years when the properties are sold.
The short term benefit being the cost of the farm would reduce the profit in this particular financial year. At the moment it is shown both as a positive cost and a negative 'closing stock' so I assume provides no short term benefit in terms of reducing profit.
Is my thinking correct and is there a particular way this should be highlighted within the accounts.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. Before I can address this question properly is this business held within a corporate envelope ie a limited company? Once I know this I can assist you further.
Customer: replied 1 year ago.
Hi Keith,
Yes the business is a limited company.
Thanks
Gary
Expert:  bigduckontax replied 1 year ago.
Right Garry, thank you for that. My personal opinion is that the original purchase transaction, as it was always intended to sell on, should have been posted as Debit Stocks, Credit Cash/Bank. Then in the final accounts it would be sitting there awaiting sale and when sold the transaction would me reversed. Simple, as the Merkat in the TV advert would say! If it is posted as a cost of sales it will skew the Corporation Tax (CT) computation and, in my opinion, improperly show a lower surplus for the year subject to tax. If challenged by HMRC the company would not have a leg to stand upon. I would reverse the current situation before the year's end accounts by Debiting Stocks, Crediting Cost of Sales. This would show an accurate presentation of the realities. I do hope that my reply has been of assistance.