It depends on your accounting basis. Most sole traders now use the cash basis, where stock is deducted when you pay for it. Limited companies, and sole traders who opt out of cash basis, deduct only the cost of stock sold, valuing unsold stock at the lower of cost and net realisable value.
Since April 2024, cash basis is the default for sole traders and partnerships made up of individuals. Under it you deduct stock purchases in the year you pay for them and you do not count what is left on the shelf at the year end. You can opt out and use traditional accounting instead. A limited company must always use accruals (traditional accounting).
Under traditional accounting the deduction is cost of goods sold: opening stock, plus purchases in the year, minus closing stock. Closing stock is valued at the lower of what it cost and what you could reasonably sell it for after selling costs (net realisable value).
The total tax over the life of the business ends up similar, because on the cash basis the £4,500 is taxed when it later sells with no matching deduction. The difference is timing: cash basis gives an earlier deduction, but hides how much stock you are actually carrying.
A simple stock sheet showing the SKU, quantity, unit cost and location is enough to start, and cloud tools such as Xero with an inventory app can replace it later. See also how to account for returns, because returned items that go back on the shelf need to return to your stock figure.
Sources: GOV.UK: use cash basis for your business, GOV.UK: expenses if you are self-employed.
We set up proper stock tracking for online sellers, so your reported profit matches your real position.
Talk to an AccountantIt depends on your accounting basis. Most sole traders now use the cash basis, where stock is deducted when you pay for it. Limited companies, and sole traders who opt out of cash basis, deduct only the cost of stock sold, valuing unsold stock at the lower of cost and net realisable value.
On the cash basis, yes, in the year you pay for it. On traditional accounting, including for every limited company, you deduct only the cost of stock you have sold, and unsold closing stock is carried forward.
Under traditional accounting, at the lower of cost and net realisable value, which is what you could sell it for less costs of sale. Damaged, obsolete or heavily discounted items can be valued below cost.
Yes. Until it is sold to a customer, stock in a fulfilment centre still belongs to you, so include it in your stock count and value it at your cost.