This particular business is a builder. They purchase land, hire contractors to build a house, and then sell the combined result as a House & Land Package to a customer. A house might be referred to as a “project”.
However, at the end of a given financial year, a house project may be part-way through construction. Any expenses incurred (purchase of land, supplies … payment of contractors) that are related to that house project need to be deferred to the next financial year and are reported in the same year as the income that is received when selling it.
Furthermore, the land component has a different tax rate to the house component.
My question is how best to track this. Somehow, at the end of the financial year, there needs to be a clear way to determine:
INCOME & EXPENSES FOR COMPLETED PROJECTS
minus
INCOME & EXPENSES FOR INCOMPLETE PROJECTS
The question is - how would the projects be tracked?
I thought of multiple options:
- Custom field
- Tracking code
- Non-Inventory Item
- Standard Inventory Item
All transactions are recorded as Bank Payments - nothing goes through a Sales Invoice or Purchase Invoice.
Custom Fields: It seems that I cannot use these, because the available reports don’t allow me to filter a Bank Payment by custom field.
Tracking Codes: This seems to work well. I can mark a Bank Payment against a Tracking Code. I can then create a Profit & Loss Report, with multiple columns. One column has all data, other columns show data for projects that were not completed that financial year. We can then do a simple “ALL” minus “ProjectA” minus “ProjectB” to calculate the amount that needs to be reported this year.
Inventory Items (both types): It occurred to me that an inventory item might work well to represent a project. There are expenses incurred in purchasing (or building) the inventory item, and then there is a set sale price at the end, which gives us the amount of profit on that project. However, I’m not sure how well this would work in practice, and I’d probably have to store the land+house as two separate inventory items … because when it gets sold, those two components are taxed differently (as mentioned above).
Which is the best approach? Tracking codes work, but I’m wanting to confirm before I get started on that approach, that there isn’t a BETTER way of handling this.
Additional info - an example:
Calculation of tax to pay (GST) on a house+land package once it has been sold:
Land: 200,000 (actual purchase price)
House: 200,000 (cost to build / cost of goods sold)
Sale Price: 450,000 (House & Land Package)
0% GST is paid on the Land.
10% GST is paid on the House Margin (250,000 - 200,000 = 50,000 * 10% GST = 5,000 PAID)
After this, additional income tax (about 30%) is paid on the total profit for that year (of which this project contributed 45,000 profit).
I suppose these are the overall questions:
- Is it better to use tracking codes, or a different method?
- Should the house and land be separated (two tracking codes, or two inventory items) … or is there a way to keep them together?