What is “private use” of stock? Our small business accountants explain
You desperately need timber for some long-overdue home-improvement. Fortunately, your workshop has just gotten a shipment of timber that would perfect for the job.
Alternatively, you need to refresh your summer wardrobe and there’s a pair of sunglasses that have caught your eye.
It might even be a case where you forgot your lunch and decided to take something from the fridge at your hospitality business.
No matter the reason, most business owners have been in scenarios where they’ve been tempted to take a piece of trading stock here or there for personal use.
And that’s completely fine – there’s nothing wrong there… provided that you process it correctly in your books!
What is “trading stock?”
When we say stock, we specifically mean trading stock.
According to the ATO, trading stock is:
“Anything your business produces, manufactures or acquires for the purpose of manufacturing, selling or exchanging”. (Source)
Don’t let the word “stock” mislead you – we aren’t talking about shares or bonds; nor are we talking about land, tools, vehicles, natural resources, or consumables.
Rather, we’re talking about physical goods that are used during day-to-day operations.
Why accounting for stock matters
Any business owner knows that stock levels need to be recorded with 100% accuracy.
A small oversight can easily snowball into stockroom chaos as you end up under-ordering, and can lead to contradictions between your inventory computer and your actual stock levels.
Not to mention, stock levels have a direct impact on your balance sheet and profit-loss statement. Discrepancies in stock levels can lead to these numbers being overstated.
Whenever you feel like taking stock home for personal use or giving your staff a freebie, you need to be sure to follow the proper accounting procedures.
Think of it this way: you’ve essentially just made a sale. Only this time, the recipient isn’t a customer, but you or one of your staff.
It still needs to be recorded on your income statement – you paid money to buy the stock, after all!
Finally, there’s the question of tax. What happens to GST associated with private usage of trading stock?
It mightn’t seem like a big deal right now – it’s just a single item. But over time, it adds up!
What to do if you decide to take stock home
When you take stock home, it needs to recorded in your inventory and point-of-sale system (and by extension, your accounting system).
It may seem tedious, but it will help you avoid a major headache further down the line.
When taking stock home, there are a couple steps you’ll need to perform…
Step 1: Account for it as if you had sold it
When taking stock home (either for yourself or a staff member), we recommend processing it using your PoS system.
This ensures that the transaction is recorded in your general ledger.
And since your PoS system is linked to your inventory database, your stock levels will be accurate, eliminating the need for a time-consuming stocktake.
Don’t worry, you won’t have to pay for it up-front – as we’re sure you know, most PoS systems allow you to offer discounts and freebies.
Step 2: Include the value of the item in your assessable income
The second step is to make sure that the item is recorded as part of your assessable income.
This means starting by recording its value.
There are a couple ways of doing this – for starters, you might:
- Record it at market value or selling price
- Use an ATO-provided estimate
Once you have an estimate, the value of the stock (excluding GST) needs to be recorded on your business income statement as a sale.
Step 3: Account for GST
This is where things can get a little complicated.
All GST-registered business owners know that they’re obliged to withhold GST on behalf of the ATO.
Furthermore, the majority of business transactions are GST-deductible.
The problem is what happens the customer is you.
It’s hard enough tracking your obligations and entitlements when it comes to business tax, even at the best of times.
That’s where your small business accountant comes into the picture.
Let a small business accountant in Melbourne take care of all your finances for you
Need a small business accountant in Melbourne? Bruce Edmunds & Associates are the team you can rely on.
Our business is helping your business. And we’ve been doing this since 1966.
Our team of small business accountants in Melbourne provide a wide range of financial services for small business owners.
From ranging from BAS and IAS statements through to accounting for stock, we’re the team to call.
Get in touch with one of Melbourne’s leading small business accountants. Give us a ring on (03) 9589 5488, or click here to request an appointment.
