Forum

• # 70431
• Tue 26 Apr 2011 02:33 PM

Hello

Just wondered if anyone knew the answer to this one

A business purchases goods for £100 + VAT.  These are intended for resale to customers at 30% markup, i.e. at £130 + VAT.   However the proprietor decides to withdraw the goods for personal use.

Is the entry in the accounts for this self-supply of goods:

A.   Debit Drawings £120
         Credit Sales £100
         Credit VAT a/c  £20
(drawing valued at original cost price, no profit on sale)

or

B.  Debit Drawings £156
          Credit Sales   £130
          Credit VAT a/c £26
(drawing valued at full marked up sales price with profit)

I have just made up this example in my head - it is not taken from anywhere.   My course suggests that A is correct, but I have read a textbook that calculated drawings as in B.,  i.e. drawing was valued at the full marked-up sales price.  If a proprietor valued his drawing at the full sales price he would incur extra VAT and possible tax on profit (?). 

Can anyone enlighten me as to the correct calculation here?

Many thanks

Edited at 26 Apr 2011 02:44 PM GMT

• RW
• 
  Quote
  

• # 70436
• Tue 26 Apr 2011 07:19 PM

Hi there

This is how I would deal with it.

For the original purchase,
Debit Purchases        £100
Debit Purchase VAT   £20
Credit Bank (or Cash acc)   £120

For the proprietors drawings,
Debit Drawings     £100
Credit Purchases   £100

I would not credit sales because he is not selling the goods to himself, he is merely reducing his
stock by taking it for his own use.

By the way, I assume you are talking about a sole trader. If you are talking about a director owner
then I would use a Directors Loan Account and debit that.

Hope that helps

Steve

• 
  Quote
  

• # 70439
• Tue 26 Apr 2011 07:43 PM

I totally agree with Steve.
The goods were brought (regardless what they were for) hence why you should not mess with the VAT.
Just take it out of purchases and put it into drawings/directors loan

Edited at 26 Apr 2011 07:45 PM GMT

• 
  Quote
  

• # 70442
• Tue 26 Apr 2011 07:58 PM

The answers are, in my opinion, wrong (or incorrect for those who prefer).

HMRC say, in respect of self supply
 "You'll have to account for VAT on goods taken out of your business permanently for private use. These goods might include:

• items from stock that you would normally sell to customers"

So you are not messing about with VAT if you do not correctly account for VAT, it is tax evasion (illegal).

You do not need to worry about the original transactions (assuming they were properly recorded). The transactions at the time of  withdrawal for personal use are

Debit drawings £120
Credit Sales £100
Credit VAT (outputs) £20 (value of outputs £100).

• 
  Quote
  

• # 72224
• Wed 15 Jun 2011 05:11 PM

I would just like to record since posting this question a month ago, that the following sources state that the proprietor's drawings should be valued at the full marked up price, as in option B:
'Understanding tax for small businesses' , Teach Yourself Books, author Sarah Deeks.
One specimen answer to a CIMA question on proprietor's drawings.
One specimen answer to a IAB Level 3 question on proprietor's drawings.

I have looked at the HMRC website, but so far have not found anything there that unequivocally points one way or the other.

Sarah Deeks says that if a proprietor supplies SERVICES rather than GOODS to himself or family, then the drawing is valued at cost price, not market sales price. 

If anyone is an expert on this topic, please let me know!!

• RW
• 
  Quote
  

• # 72290
• Fri 17 Jun 2011 08:47 AM

Following is a quote from HMRC website discovered today:
"mistakes are often made when recording sales if you take stock for personal or family consumption. Even if you don't take record these transactions through a till you still need to keep  a record of them.... You should note down the goods or services taken or supplied AT THEIR NORMAL RETAIL PRICE AND YOUR BUSINESS PROFITS MUST BE WORKED OUT USING THIS VALUE " 

• RW
• 
  Quote
  

• # 72292
• Fri 17 Jun 2011 09:54 AM

Hi Rw,

Would you mind posting the HMRC link you mentioned this morning. About mistake being made while accounting for stock used for personal use.

Relevant information from the HMRC is the best answer to settle this lingering discussion.
Geoff previous post is confirming what you mentioned.

Regards,

xxx

• Provide bookkeeping and virtual accountancy assistance service in English and French @nckaccountancy.
  West Essex Twitter:http://nckaccountancy.co.uk
  E-mail: info@nckaccountancy.co.uk
• 
  Quote
  

• # 72319
• Sat 18 Jun 2011 10:39 AM

Hi Geoff

Thank you for your comments.

I have found two webpages on HMRC site which state the above:  one for sole traders and the other for partners.

www.hmrc.gov.uk/sa/rec-keep-self-emp.htm
www.hmrc.gov.uk/sa/rec-keep-part-partners.htm

(My web browser isn't allowing me to paste the link, so I have copied the link references above)

The quote is in the section towards the bottom of the documents entitled 'records relating to both business and personal use.

It seems to me that HMRC regard the proprietor's ability to get personal goods at lower trade prices as a  taxable perk.

This matter appears to be confusing to the providers of bookkeeping courses as I have encountered student practice problems that calculate drawings in different ways - a matter which provoked my original enquiry.

Regards

RW

• RW
• 
  Quote