Don’t Forget Stock Takes and Write-Offs
For the majority of taxpayers, 31st March represents the end of the tax year. There’s things you can do before the end of the financial year to help minimise your next tax bill and tidy up the books ready for a new year.
IRD requires that stock on hand (excluding livestock) must be valued at the lower of cost or market value.
Do a physical stock take to ensure obsolete stock is physically disposed of or written down/written off. It may seem tedious, especially if you think you have a good idea of quantities, but it’s much better to get a 100% accurate record the first time.
Any business carrying large amounts of stock, from retailers to tradies, will either have less stock on the shelves than they thought or will have obsolete stock that needs to be thrown out.
If you carry out a stock take before 31 March, you’ll be able to write down or write off this missing/obsolete stock in the financial year – this will help reduce your next tax payment.
It’s important to understand why there is a difference in stock recorded and check the accuracy of your computerised records (if you have them). There could be a number of reasons, including:
- Stock is stolen – burglary in the warehouse or shop, pilferage by shippers, shoplifters or, unfortunately, theft by the company’s own employees – this kind of inventory loss is common.
- Market value of the product has decreased – due to lack of customer demand or aggressive pricing by competitors.
- Stock suffers damage or spoilage – perishable goods such as vegetables, fruits or cut flowers for instance have a short “shelf life”. Disasters or accidents can also drastically destroy or lower value.
- Items become obsolete or out of date – printed magazines and other dated publications may have a high value for no more than a few days. Designer fashion clothing may command a high market value for a relatively short “season”.
Useful Tip – Don’t forget to open boxes – just because the carton says there are 24 items in the box doesn’t mean there actually are.
Check the physical count against accounting records – check discrepancies. Plug the gaps and improve systems to limit it happening again.
Once the stock take has been finalised, update the inventory records, including values (remember the lower of cost or market value) and add this to the annual accounts information for your accountant.
Write off any bad debts
We all hate them but we probably have one or two bad debts (hopefully not too many more…). If you don’t write them off before 31 March, you’ll be paying tax before you need to.
A write-off is an accounting term referring to an action where the book value of an asset is declared zero. This loss becomes an expense.
Please note that writing off the debt by the accountant does not remove the customer’s obligation to pay. Writing off the debt serves only to improve the company’s accuracy in accounting and it can save on tax.
What’s a bad debt? A debt is considered bad if a reasonable and prudent businessperson would be of the view that it is unlikely the debt will be paid. Factors to consider are the length of time the debt is outstanding, the efforts that you have taken to collect the debt and information on the debtor.
Although recording a bad debt can be done in Xero, we recommend you discuss this with your accountant or bookkeeper, as the method you choose on recording a bad debt will depend on your GST registration status and how you want the transaction to be reported in your GST return, Cash Summary report and Profit and Loss Report. Make a list of your bad debts and add this to the annual accounts information for your accountant.
Do any repairs you’ve been putting off
Now’s the time to do the repairs on machinery you were planning to do in April, or get the maintenance done on your rental property that you’ve been putting off. If you can bring these repairs into the 2018 financial year, you’ll be able to reduce your next tax payment. The flip side is that your tax payments for the 2019 year will be higher, but a dollar saved today is better than a dollar saved tomorrow.
Home Office Expenses
It’s also a good time to go through and pick up everything you’re legitimately entitled to claim in relation to your home office.
This includes, power, rates, rent or interest on your mortgage, insurance, repairs, phone, insurance and more. You can claim a portion of these equal to the amount of your house you use for business. Give us a call if you’d like a hand figuring out exactly what you can claim.
Finally, the sooner you get your end of financial year information to the accountant, the sooner they can prepare your accounts and give you feedback on the performance of your company. As well as planning for tax you may need to pay, focus on margins, trends, benchmarking (comparisons with others in your industry) and planning with budgets and cash flows. The better your dashboard, the more equipped you will be to drive your company forward.
Have an end of financial year meeting with your accountant to discuss your results and plan for ahead for an even better year ahead.
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