Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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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 tax guide 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 manufactured during the year are sold out at the end of the year --- the cost of the remaining goods or work-in-progress at 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;  

whereas:

Cost of goods sold = Opening stock + Cost of purchases - Closing stock.

The computation of cost of purchases seldom gives rise to tax disputes.

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.  Click here for more.

 

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