The Ins and Outs of trading stock

Posted on 21st October 2014 by Christabelle Harris

What is trading stock?
Trading stock includes anything you produce, manufacture, acquire or purchase for manufacture, sale or exchange.

What isn’t considered to be trading stock?
Stocks of spare parts held for repairs and maintenance, goods acquired to be hired out to customers and consumables used in manufacturing trading stock such as cleaning agents.

Standing or growing crops, timber or fruit are not considered to be trading stock either. They become trading stock when they are harvested, felled or picked.

How do I value my trading stock?
There are several ways that you can value your trading stock.

The most commonly used method is cost. This means that the stock is valued at the price paid . The cost of the trading stock also includes expenses incurred getting the stock to its existing condition such as freight, handling charges and cost of labour.

Using the market selling value is another method. This is the value from a sale or sales in the ordinary course of the taxpayers business. For a retailer, it would be the current retail value. For a wholesaler, it would be the current wholesale value.

The replacement value method is another way you can value your trading stock. This is the price at which trading stock can be replaced by the taxpayer buying a comparable item in the market. To use the replacement value method, the items must be available in the market and be substantially identical to the replaced items.

What happens if my stock becomes obsolete?           
If your stock becomes obsolete, you can elect to write down the stock to a lower value, providing it is still reasonable.

For stock to be considered obsolete it must be out of use, out of date, unfashionable or outmoded. You must be able to show that there is no reasonable prospect of future sales of the stock.

You can decide to either make a once-off write-down or a progressive write-down of the value of the obsolete stock, although a progressive write-down is more commonly used and preferred. Obsolete stock which remains on hand should generally by valued at its scrap value.