New Sole Trader - Self Assessment Question

There are two options. The "normal" option is to prepare accounts and tax returns on the "accruals/matching" concept where you match your sales against costs of those sales, i.e. adjust for stocks at start and end of each year. You also adjust for other "timing" adjustments such as monies owed/owing at each year end and do accruals/prepayments for things spanning two years, i.e. if you pay for a year's worth of a subscription in the middle of year 1, half of it relates to year 2, so you adjust so half falls in each year.

The other option, and simplest, is the "cash" basis, which is as simple as it sounds - simply you're taxed on the difference between incomings less outgoings, so it basically mirrors your bank statement and you don't make any adjustments at all for things you've paid for which you still have in stock, things you've bought in advance, or amounts outstanding for things you've bought.

Lets say you are going to quite good at this and so can't use the cash basis as you grow in sales.

You need an example to work from;

So at the end of year 1 on the 5th April 2019, your sums go like this;

In the previous year from 06/04/2018 you bought stock costing you £10,000 (all the way up to 5th April including that 1 item you bought on 5th April for £2,000 but didn't sell yet). Opening Stock = Zero as you were just starting out.

In the 12m you sold stuff and took £30,000 cash (I'm assuming there's no credit given to anyone so you only post once you've been paid).

You didn't sell £3,000 (cost to you not sales value) of your £10,000 purchases (Closing Stock)

Your accounts are therefore ;

Sales/Turnover, £30,000

less
Cost of Goods Sold (COGS for short), £7,000

Calculated as;
+ Opening Stock (zero)
+ Purchases (£10,000)
- Closing Stock (£3,000)
= £7,000

Gross Profit £23,000

Opening Stock for year 2 is now £3,000

Sales in Yr 2, £50,000 (oooh, youre doing well)
Purchases £15,000
Stock at y/e £5,000

Accounts;

Sales, £50,000 less
COGS, £13,000 (£3,000+£15,000-£5,000)
Gross Profit £37,000

Stock is always the lesser of cost or Net realisable value (NRV), so if you buy something that becomes worthless (breakage, fake, theft), you value it at the lower. So stock won't always necessarily just be 1 figure less another, due to re-valuations.

That's why on the tax return you only get asked for 1 stock figure, i.e. the closing one.