Accounting for born on farm livestock (sheep)

[scatterbrainedlass]

Not sure if this is the right thread, please re-direct me if it would be better somewhere else. Just need advice on how you do the following:

We understand that livestock needs to be valued at year end. Bought-in stock is fine because there is a cost attached but what are the book-keeping entries for born on farm stock (lambs)?

 

[Poorbuthappy]

Not sure if this is the right thread, please re-direct me if it would be better somewhere else. Just need advice on how you do the following:

We understand that livestock needs to be valued at year end. Bought-in stock is fine because there is a cost attached but what are the book-keeping entries for born on farm stock (lambs)?

Stock should be valued at the lesser of cost to produce or market value.
May be different if your accounts are run on herd basis.

 

[scatterbrainedlass]

Stock should be valued at the lesser of cost to produce or market value.
May be different if your accounts are run on herd basis.

Stock should be valued at the lesser of cost to produce or market value.
May be different if your accounts are run on herd basis.

The valuation isn't the problem, it's how to actually enter it in the accounts (how to counterbalance the asset entry). If you buy stock the cost will balance the asset column. How do you balance the born on farm animals?

 

[Jerry]

The valuation isn't the problem, it's how to actually enter it in the accounts (how to counterbalance the asset entry). If you buy stock the cost will balance the asset column. How do you balance the born on farm animals?

Against reserves I believe.

 

[neilo]

Stock should be valued at the lesser of cost to produce or market value.
May be different if your accounts are run on herd basis.

75% of market value IIRC, or COP.

 

[The Ruminant]

Against reserves I believe.

Exactly.
I’m not an accountant but I think of it like this, @scatterbrainedlass :
If I bought an animal for £100 cash, my double entry would be reduce cash account by £100 and increase stock value by £100, no profit or loss on the transaction. If I then sold the animal for £500 cash, my entries would be reduce stock by £100, increase profit by £400 and, on the other side of the equation, increase cash by £500.

For an animal born on farm, say it’s valued at birth at £100 then the double entry would be increase stock by £100 and increase profit by £100. Alternatively, and realistically, you’re not going to value each animal as it’s born, instead you’re going to value them once a year, at the year end. By this stage the animal might be valued at £300 so at the year end your valuation would be increase in stock of £300 and increase in profit of £300.

If then, in the following year, you sold the animal for £300, your entries would be to reduce stock by £300 and increase cash by £300. No profit on the sale so no profit entry (because you’d already accounted for the profit in the previous year’s accounts)

The above ignores the rule, pointed out by others, that it should be valued at the lesser of cost or net realisable value but you’ve said valuation isn’t a problem for you.

Hope this helps

 

[scatterbrainedlass]

@The Ruminant if it's going on profits and stock does it not then become taxable? Surely tax shouldn't be paid on animals that are still in my field and I have not actually made (or lost!) any money on?

 

[egbert]

You can value your homebred stock at whatever level you like, and unless the values shown are stupidly adrift, no-one can argue.
(is every tup on your property a £50k blackie? or a limpy £50 gummer?.....can the revenoo tell the difference?)
A rascal might very well use these values, year by year, to mitigate current or future 'liabilities'. In a lean year, you increase the paper value of the stock, so that you can ease them in a better year.
Obviously, there's not much point in that if you're not getting better years, and the 'herd basis' business is something my accountant has to explain to me every time.
And if your bank need to see the figures.......

 

[CornishRanger]

@The Ruminant if it's going on profits and stock does it not then become taxable? Surely tax shouldn't be paid on animals that are still in my field and I have not actually made (or lost!) any money on?

Your asset value and therefore net worth will have increased, which shows in the accounts as a profit, and is therefore taxable. You won't be taxed again on that at point of sale, (but you will be on any further increase in value between valuation and sale).

 

[scatterbrainedlass]

Your asset value and therefore net worth will have increased, which shows in the accounts as a profit, and is therefore taxable. You won't be taxed again on that at point of sale, (but you will be on any further increase in value between valuation and sale).

Ah ok, so if you made a profit or loss on your valuation the tax would adjust accordingly, but if you sold at valuation cost nothing changes??

 

[spin cycle]

@The Ruminant if it's going on profits and stock does it not then become taxable? Surely tax shouldn't be paid on animals that are still in my field and I have not actually made (or lost!) any money on?

afraid so.....if an arable farmers yr end is april 6th....they have to value 'crops in ground' as a valuation despite having only shelled out thus far

 

[The Ruminant]

@The Ruminant if it's going on profits and stock does it not then become taxable? Surely tax shouldn't be paid on animals that are still in my field and I have not actually made (or lost!) any money on?

Yes, as already said, it does become taxable. You can always have a very low valuation of stock in your accounts but there are two issues: First is getting caught, which may mean a large fine etc, though I’m not sure how many times the revenue has actually caught someone for this; second is that you will have to pay tax on it one day. Better to pay it annually rather than in one huge lump sum when you retire and sell up, and the stock makes 100 times what they’re valued at in the accounts.

Of course the downside of paying tax against increased stock valuations is that you’ve not actually converted the stock into cash, and yet have to stump up hard cash to pay the taxman

 

[neilo]

My accountant always advised me to keep valuations fairly even and not have any big swings in any one year. Alarm bells apparently start going off at HMRC if your stock valuations suddenly halve, if your accounts are reviewed of course.

 

[gatepost]

The important thing is to make sure that your valuation is done on a consistent basis every year, Cost of production or 75% market value, but don't jump between the 2, then you don't end up making' paper profits'. you will either have it in the bank or on 4 legs, there is a HMRC book to help.

 

[farmerdan7618]

As has been mentioned, stock must be valued at the lower of cost and net realisable value, and the journal entries are a debit to the balance sheet to recognise the asset, and a credit to the p+l within cost of sales.
This at first appears as if you are taxed on the value of the stock, however:
With home produced animals, there is no direct purchase, but in the case of lambs, you have kept the ewe for the year with the purpose of producing lambs to sell.
The cost of keeping the ewes is tax deductable, but you then have no income if you haven't sold the lambs.
Therefore, by recognising the valuation of the stock in the p+l, the tax effect should be nil.
Herd basis is a very different method of valuing production animals, and something a specialist agricultural accountant will advise on, but it is not particularly straight forward.

 

[Coximus]

My accountant values the animals at the lowest value reasonable - - As the justification being the animal could a) die at any moment as its a sheep, b) has no value until it is sold c) I sell at auction and as he said (he keeps sheep too) " an identical pair of cull ewes sold seperatley could fetch $8 one week and $45 the next....

So the value of the lambs unsold and any new homebred ewes is entered as the COP / sheep numbers - IE the cost of getting the sheep to their current date in life, and any profit does not exist until the sheep is sold, and given prices, espeically of breeding ewes, can vary wildly by the hour at auction (ive sold two identical pens for 20/head difference just down to what time in the auction on the day). This simply means any profits are booked in the financial year the sheep is cashed in, as opposed to the year it is born.

This is justfied because the end result is the same, but any adjustments are avoided. Example;
Sheep is born in financial year one and valued at 80 (30 profit), but is not sold, as it doesnt finish for market before yaer end
Sheep is sold on day 1 of following acc year, and sells for 75, as such their is now a 5 loss to account for in the following year and tax due on the profit from 80, of 30, as opposed to 25, but with a loss of 5 offsetting it in the following year.

Whereas if the sheep is valued at its COP of 50, and carried forwards then the profit is booked in the correct year and their is no need for adjustments,

 

[Rod Dumbreck]

Not sure if this is the right thread, please re-direct me if it would be better somewhere else. Just need advice on how you do the following:

We understand that livestock needs to be valued at year end. Bought-in stock is fine because there is a cost attached but what are the book-keeping entries for born on farm stock (lambs)?

Some software will have a specific way of accounting for the livestock valuation.

If you are just using a spreadsheet, then you can use "change in valuation" figure as a "sale" assuming its gone up. The various purchases and sales as you observe are recorded, the births and deaths in the year are the difference between this year and last.

 

[HBush]

For calculating my income tax I have a table of valuations. The columns are last tax year and this tax year and change in valuation The rows consist of the things I am valuing e.g. ewes, or fertiliser or hay bales. So, if last year I had 50 ewes @ £100 each on the last day of the tax year, and this year I had 55 ewes at £100 each, my valuation change for ewes would be +£500, and that would be taxable. When you have inserted all your rows of things onto the table, and calculated their change in value, you can tot them all up to give a total stock valuation change figure. If it is negative, you subtract it from your sales figure and reduce your income tax, if positive your tax goes up.
Next year when you are doing your tax, you would look up last years table of valuations and transfer the valuation column headed this tax year over to your new table.