Accounting for Trade-Ins


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I do my own accounting and am wondering what is the best way to record sales that include a trade-in of an instrument previously purchased from me in a prior year.    Is it best to simply consider the traded in instrument as a new inventory purchase?

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It doesn't make any difference that you sold it in a previous tax year. Now it is simply a violin that somebody used in a trade.

I think that you can treat it as inventory purchased by you for whatever value you assigned it in the trade as long as it is reasonable. Using the recent purchase price would be reasonable.

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I guess one good thing is that your state doesnt have sales tax, that sometimes ends to be a complication in these deals.

BTW maybe you should actually hire an accountant, usually worth it.

 

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Whenever I take an instrument in trade, whether I sold it or not, I record all of the payment that I receive as income and enter the trade-in in my inventory at zero cost.  I also do my own accounting, and I devised this method because it seemed to make sense.

Edit:  I suppose the alternative would be to add the trade value to the payment received to get the amount recorded as income, and enter the cost of the trade-in in inventory at its trade value.

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47 minutes ago, Brad Dorsey said:

Whenever I take an instrument in trade, whether I sold it or not, I record all of the payment that I receive as income and enter the trade-in in my inventory at zero cost.  I also do my own accounting, and I devised this method because it seemed to make sense.

That is what I have done in the past....just thought I would see how others handle this.

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I think it is better (from a legal standpoint) to record the full sale price as income and the trade-in value as a cost, either as a payment or as a "return." Only recording the net amount received could make it appear like you are trying to hide income, since the income is lower and you now have an instrument (the trade-in) that you paid nothing for. It should all work out, but usually they like to see all the details recorded. 

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5 hours ago, deans said:

I guess one good thing is that your state doesnt have sales tax, that sometimes ends to be a complication in these deals.

 

 

Not complicated at all, if you look at it as whatever is in CDTFA's advantage (Cal Dept of Tx and Fee Ass)that's what's supposed to happen.

Brad H, previous posts are right, just list the sale in full, and the tradein like a purchase.  As far as sales tax (in Calif), you collect (and pay) tax on the full amount of the sale (NOT the diff)....period.  Now...if you the sale of the item (and subsequent trade in) gets discounted lower....then........................

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On 2/2/2021 at 11:59 PM, Jeff White said:

Not complicated at all, if you look at it as whatever is in CDTFA's advantage (Cal Dept of Tx and Fee Ass)that's what's supposed to happen.

Brad H, previous posts are right, just list the sale in full, and the tradein like a purchase.  As far as sales tax (in Calif), you collect (and pay) tax on the full amount of the sale (NOT the diff)....period.  Now...if you the sale of the item (and subsequent trade in) gets discounted lower....then........................

Different accountants in different states may handle this differently. If you take a crap trade in order to make a sale you may be merely offering the violin you are selling at a discount price but over valuing the trade to keep the price of your merchandise up. If you value the trade at full price you may end up paying tax up front on something which you may have in your shop forever and never sell at all.

Get an accountant they really are worth it.

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31 minutes ago, nathan slobodkin said:

 

Get an accountant they really are worth it.

This, times 1000.

I'm always amazed that some of the same people that will disabuse "amateur luthiers" from working on instruments have no problem slinging accounting advice or encourage people to DIY their tax work. Use a professional, that's what they are for.

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The OP is located in Oregon where we have no sales tax, so that should make things easier unless he sells at a trade show/convention. I did find some references that (at least for some states) the sales tax is on the difference between the trade-in and new item, so it definitely makes sense to use an accountant in states with a sales tax to get all of that recorded correctly. 

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14 hours ago, glebert said:

The OP is located in Oregon where we have no sales tax, so that should make things easier unless he sells at a trade show/convention. I did find some references that (at least for some states) the sales tax is on the difference between the trade-in and new item, so it definitely makes sense to use an accountant in states with a sales tax to get all of that recorded correctly. 

As said different rules in different states. My non accountant understanding of the rules in Maine are that you must charge sales tax on the full retail price.

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11 minutes ago, nathan slobodkin said:

As said different rules in different states. My non accountant understanding of the rules in Maine are that you must charge sales tax on the full retail price.

My CPA says the same thing concerning sales tax in Michigan.

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On 2/5/2021 at 9:58 AM, Jeffrey Holmes said:

My CPA says the same thing concerning sales tax in Michigan.

Yup, 3 sales tax audits and they if they catch you discounting the sold item (and subsequently discounting the trade in to save on sales tax.....)Maxwell's silver hammer comes down.  They specifically look hard for this, knowing it's everyone's first thought.  When something has an "obvious" value (we mainly deal in used instruments), I don't fudge, but when I can.........................  You just really need to look at it in the eyes of the auditor, and that they aren't naive.  If no sales tax, it really doesn't matter how you do it as long as the final balances out.

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On 2/8/2021 at 5:41 PM, Jeff White said:

Yup, 3 sales tax audits and they if they catch you discounting the sold item (and subsequently discounting the trade in to save on sales tax.....)Maxwell's silver hammer comes down.  They specifically look hard for this, knowing it's everyone's first thought.  When something has an "obvious" value (we mainly deal in used instruments), I don't fudge, but when I can.........................  You just really need to look at it in the eyes of the auditor, and that they aren't naive.  If no sales tax, it really doesn't matter how you do it as long as the final balances out.

Get an accountant, get an accountant, get an accountant............

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On 2/2/2021 at 8:17 PM, glebert said:

I think it is better (from a legal standpoint) to record the full sale price as income and the trade-in value as a cost, either as a payment or as a "return." Only recording the net amount received could make it appear like you are trying to hide income, since the income is lower and you now have an instrument (the trade-in) that you paid nothing for. It should all work out, but usually they like to see all the details recorded. 

I endorse this approach. Here's how you would do it in quickbooks. How to journalize trade-in credits for a retail store in QuickBooks - Quora

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