Boat dealer - income statement overstated due to trade-ins

eastend1 · ‎June 06, 2021

Hello,

I am working on a small boat dealership. Often times a customer will trade-in an existing boat for a new one. I have created a trade-in system by using a clearing account and "buying" the used boat via a bill to zero out the clearing account. It works great and the invoices are all correct to reflect what we actually received and calculating proper sales tax (very important that the sales tax is calculated properly).

My problem lies with the income statement. It appears that the revenues line is overstated and does not reflect the reduction due to trade in item. If a boat costs $100k and a trade is $80k I expect the revenue to reflect $20k, not $100k as the trade-in item needs to be sold to collect the remaining $80k. I think this is because the trade-in clearing (which is used on the invoice to zero out the clearing account) is tied to the clearing account (an asset) not an income account.

Right now my income statement is overstated by almost 2 times what is reported in sales tax center, which is reporting the correct taxable/gross income figures.

Thank you for any help

john-pero · ‎June 06, 2021

The profit on the $100k boat is unrelated to the trade-in. A trade is just a cash equivalent and the trade-in gets its own inventory cost on your books as a resale asset until you sell it. Your $100k boat has its own cost. Whether floor-planned and an invoice is owed to the supplier or you paid cash to acquire it, whatever its cost is, is what you deduct from income for net profit. It could be $80k or it could be $50k or even $90k, in which case you made 20, 50, or only 10k on the deal. Disregard the trade in calculating profit on boat 1.

View solution in original post

john-pero · ‎June 06, 2021

The profit on the $100k boat is unrelated to the trade-in. A trade is just a cash equivalent and the trade-in gets its own inventory cost on your books as a resale asset until you sell it. Your $100k boat has its own cost. Whether floor-planned and an invoice is owed to the supplier or you paid cash to acquire it, whatever its cost is, is what you deduct from income for net profit. It could be $80k or it could be $50k or even $90k, in which case you made 20, 50, or only 10k on the deal. Disregard the trade in calculating profit on boat 1.

eastend1 · ‎June 07, 2021

Thank you for this. I was definitely over thinking this and your response cleared it up. With regards to sales tax, the reported gross sales figure is understated, but taxable sales is correct. I assume that because of the limitations in gross reporting in sales tax center that I should use income statement for the tax period. Do you have any insight here?

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Boat dealer - income statement overstated due to trade-ins