In Profit Or Not?

[DarceyK123]

Earlier in the year daughter started an online / eBay type business which she could work from home around the kids.

It soon started to take over the house so she had a summerhouse built in the garden where she now works from and keeps stock.

After a shaky start not buying the right stock and suchlike she now tells me she's making a profit. I asked if she had taken off the price of the Summerhouse (about 2k) she said no as it's an asset to the house blah blah.

I think she's kidding herself that she's in profit if she's not taken that into account.

I don't really want to rain on her parade as she's working so hard and I want to encourage her but that's what I think, what do you folk think?

[bednobs]

unless you know how much she is making- how will you know if she is in profit or not?

[DarceyK123]

Well she told me this week it was the first week she's been in credit by about £200.

[fiction-factory]

The £2k cost can be spread over several years

[DarceyK123]

I don't know anything about proper accounts but surely if you owe on something then you're not in profit.

What I mean is she's not putting it down as an expenditure as she would stock, packaging and suchlike.

If she stopped doing it tomorrow then she will never have made a profit.

[MallyJ]

In order to find out if she is in profit she must keep detailed accounts. She can then work out properly whether she is making a profit week by week...for example on the debit side she would need to list stock bought, postage, packaging, printer paper, printer ink etc etc..as is appropriate for her business...the list could be huge although not add up to a great deal....on the other hand she needs to list what she sells and the price paid. From this she will be able to work out profit/loss and whether to adjust her pricing. The summer house may well be an asset should she sell her house but I hope it is very secure if that is where she stores business related items

[sherrardk]

Also, the summer house is worth something in its own right.

[fiction-factory]

It's certainly not uncommon for companies who make large profits to owe money. In a profit and loss account you would consider the depreciation of the summer house. Costs like this are usually spread over maybe 5-10 years. Many firms don't make money in the early days anyway.
Is she paying herself a wage though- a small profit is no go if she is working for nothing other than some or all of a small profit

[Peter Pedant]

well having crashed out of L3 accountancy this year (I failed and need to retake) the correct answer is

it is an asset - so should be included in the balance sheet of a sole traders accounts and not profit and loss

there may be a depreciation charge each year and that is counted as an expense in the profit and loss sheet

The depreciation charge each year is knocked off the Non Current Asset entry. If the asset is sold for something at the end of its budgeted life - a balancing entry is made

I did not fail the depreciation of non current assets - but the *** spreadsheet option.
Ho hum it seems I learnt something after all

so in short - she's right and you're wrong.

The piling on of losses for the first year so the second years trading is MUCH better but perhaps still losing - is the subject of a Nevil Shute novel - the hero does time for it - as it is/was fraud even then.
but he saves the town and they all love him when he comes out
Can't remember the title - NOT a town like Alice

[DarceyK123]

Oh it's so complicated isn't it? That's why I'm employed not in business.

Glad that's I'm wrong though.

Thanks all.

[woofgang]

PP I think its Ruined City.....interesting book. I enjoyed Trustee from the Tool Room as well

[Smowball]

Does it matter really?