Profits Tax - Cost of goods sold
Profits equal to sales minus cost. The question of what "sales" or what "income"
are assessable are discussed in my
concerning Assessable Profits. Now, Let me talk about what is
"cost" or precisely, what is "cost of goods sold".
A trader selling goods must first buy it
or make it. Therefore, the
cost of purchase, including all the related costs such as delivery,
commission, breakage..., etc as well as the cost of manufacturing must form part of the cost of goods
sold. For a on-going business, not all the goods purchased or
the year are sold
out at the end of the year --- the cost of the remaining goods or
year end should
therefore be deducted from the total cost of goods sold for the year and
then carried forward to the following year
(called closing stock) to match the related sales of the following
year. Therefore, it follows that
for an on-going business, there should be cost of goods
brought forward (called opening stock) at the start of accounting
year forming part of the cost of goods sold for the year.
|To put it mathematically:
Profits = Sales - Cost of goods sold;
Cost of goods sold = Opening stock + Cost of purchases - Closing
The computation of cost of purchases seldom gives rise to tax
The valuation of stock can sometimes lead to tax disputes
because there are a number of valuation methods under generally
accepted accounting practices and different method can give rise to
different assessable profits.
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