Business and Trading Income, Trading Stock, and Accrual Rules
Core framework
Business income is income under ordinary concepts, including proceeds from sales, services, and certain receipts that are revenue in nature. Candidates must know the trading stock rules, the accrual rules for financial arrangements, and the treatment of bad debts, provisions, and grants.
Key concepts: trading stock includes goods held for sale or manufacture; valuation methods are cost, market selling value, replacement price, and discounted selling price, with consistency required. The accrual rules spread income and expenditure on financial arrangements over their term using the yield to maturity method or a permitted alternative. Bad debts are deductible if written off and previously included in income. Government grants may be taxable or non-taxable depending on their nature.
Traps
- Deducting a provision for doubtful debts; only written-off bad debts are deductible.
- Valuing closing stock at cost when market value is lower, without applying the lower of cost or market rule correctly.
- Ignoring the accrual rules for a loan or hire purchase arrangement.
- Treating a capital grant as income; distinguish revenue grants from capital contributions.
Worked example
Opening stock $20,000, purchases $80,000, closing stock $25,000. Cost of goods sold = 20,000 + 80,000 − 25,000 = $75,000. If closing stock market value is $22,000, the lower of cost or market may reduce closing stock to $22,000, increasing cost of goods sold to $78,000.
Rule of thumb
Match income and expenses to the year they relate to; use the accrual rules where a financial arrangement spans years.