Am I over-complicating things?!

Hi all.

I’m a sole trader in the UK in the process of setting up my COA and trying to get my head around which would be the best approach to enable me to quickly and simply undertake my own bookkeeping.

I wanted to enrol at College to study, but they asked for my full accounts in order to receive funding for the course. Needless to say, panic has set in and I’m trying to start entering the pile of receipts I have and generating a COA that would best suit a one-man joinery business (no employees, not limited, no PAYE…)

I do make things for customers, but haven’t tracked inventory. I appreciate that a granular COA would allow me to gain a better insight into the profitability of each job and analyse where I’m spending money (working on the assumption that there is profit :laughing: :). I don’t yet make goods that I could take to market, per se, but plan on coming up with some products in the future.

Pretty much all work undertaken so far, including situations where I have used private funds to buy materials and these have been reimbursed at cost (family as customers), have not been for profit, and except for a few lengths of wood and lengthy off-cuts, have not been used for the business. All receipts have been given directly to the customer. I have charged for my time only in terms of what I am entering into the accounts package.

I’ve set up Wave, Pandle, and now Manager is downloaded and I’ve started to create my records. I also have a number of spreadsheets (monthly templates).

I’m confused as to whether to use Inventory or not, whether I should really worry about COGS and then all of the allocations of resources purchased, especially when some things are never stipulated in the Sales Order (for example, my brother took over the tenancy of a pub, and I was asked to create him a beer garden. I’ve put up fencing, laid paving, bought plants, made a number of very large planters, etc. etc. All materials were paid for with both upfront and delayed funds by my brother. I have billed him for my time, NOT the planters, or the fence, or the paint used.)

My next potential customer, however, wants me to build two log stores. I’ll have to ask him to pay a deposit to cover materials. So this is where the COGS confusion comes in. As the customer will pay a deposit, materials I purchase will be used solely for the construction of the two stores. But are the stores classed as goods sold? Or are they the end product of a process of satisfying the customers request to supply him with two log stores? In my head there is a difference. But in accounting terms are these the same thing?

I am keen to hear your suggestions or even past experience in setting up a small ‘craft’ business, and whether that granularity is overkill or not. I have no investors to answer to, my wife keeps pushing a bit of cash my way to buy materials and tools, etc.

Thanks.
Wes

My thinking is along the lines of the planters, fence and patio above are not what I would class as items that would be placed into stock, and held in stock until someone comes along and purchases them. They are the hole that you’re selling when you sell a drill bit. Whereas if I make ten planters and store them, not knowing when they will be sold, they become inventory, and I need to account for the materials used in my accounts… something like that anyway :wink:

You have asked way to many questions to address individually. I’ll just say you have not described a business that will deal in inventory at first, so don’t set it up that way. Read this Guide for initial guidance: https://www.manager.io/guides/10809. Handle your material purchases as billable expenses. You can always add inventory later. For background on that, read the three-part Guide beginning here: https://www.manager.io/guides/11111.

Set yourself up a test business. Play with it. When you have specific questions, post them on the forum.

@Tut thank you for the feedback and direction. I’ve been reading a lot of stuff online and I think this is part of where the confusion comes in. It would appear that most of the information online is aimed at larger manufacturing companies. I do want to be able to see quite early on what is profitable for me, as this will have a direct impact on the direction I will take the business. I don’t want to be spending 8 hours making something only to discover that in reality I’m only earning £2 an hour. I’ll take a look again at the guides you’ve suggested. I am going to use two tracking codes (JOIN and HAND) to differentiate between different aspect of my service offering.

I’ll take your advice and set manager up as a small business as per the guide.

Thanks @Tut.

Hi Wes

COGS is normally for process industry as well as for a trading business.
What you are doing is very much a JOB ORDER. You get order and start working on it.

Receiving advance payment or delayed payment does not impact the nature / method of accounting needed (job order costing). Its a matter of receivable or payable to customer on balance sheet date.

My humble suggestion:

For each job you have been entrusted with

  1. Open an income account (Job wise)
  2. Debit it with all the payments you made for completing the job
  3. Credit it with all the payments you received from customer (Assuming you are paid with exact cost of material you bought and labor hours you charged)
    4.1) On completing the job the excess of credit over debits shows your income
    4.2) If job still not completed and balance sheet date arrives then you need to pass journal voucher (JV)
    4.2.1) If debits total is in excess of credits total then debit receivable from customer and credit that income account (Amount should be exactly the same as it exceeds the credits total)
    4.2.2) If credits total is in excess of debits total then debit this income account and credit payable to customers (Amount should be exactly the same as it exceeds the debits total)
    4.3) After the year end, you need to reverse that JV (on first day of next accounting period).

I hope it all MAKES SENSE :slight_smile:

Please let us know, how you handled it finally.

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I think this would be a questionable practice. If you open an income account to build a store fixture in 2019, that account will still be on your financial statements in 2029. A better approach is to use tracking codes, either one for each type of job or one for each job. The chart of accounts will remain simple, but you will be able to look at profitability for each tracking code. See https://www.manager.io/guides/8956.

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Hi Tut

  1. Reports are generated period wise.
  2. Income and expense accounts got closed at year end (Frankly, i am not sure how modern accounting software (now a days) handle income and expenses accounts after year end). Long back, on year end all income and expenses accounts initialized (ZERO) on first day of next accounting / financial year.
  3. I also will look at https://www.manager.io/guides/8956

Thanks for sharing your views. Appreciated.

Manager is a perpetual system. Income and expense accounts are never closed.

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@modernvision, @tut thank you both for your input. It is appreciated! :+1: