The purpose of the Phoenix Profit & Loss report is to determine the profitability of the whole or part of the business being reported on. This is as opposed to the profit figure on which the business will be taxed.
This is evident by the fact that parts of the business activities can be included or excluded from the report. The taxation figure would only be an overall figure, since the taxation situation does not care what parts of the business generated the profit.
The impact of this difference is noted mostly in the method of profit / loss calculation for the commodity and livestock trading components of the business.
We need to consider the handling of transactions when individual accounts or enterprises are included or excluded from the report:
Livestock Accounts
When producing a Livestock Report in Phoenix, there is an option of using taxation values. This method uses the cost price of livestock, together with an arbitrary assumed cost for natural increase to generate the value of livestock on hand. Although this is the method prescribed by the ATO for determining taxation profit figures, it tends to undervalue livestock since it is hoped that animals will continue to increase in value while held by the business. When reporting on the profitability of a business, the true profit (even if some or all of this profit is unrealised) is more useful than the arbitrary profit calculated using the cost price method. Phoenix offers the alternative of tracking actual market value of livestock as well as the cost price method when producing livestock reports, but will only use the market value method when producing the Profit & Loss report.
Commodity Accounts
When producing a Commodity Report in Phoenix, individual commodities are valued according to the entered values rather than a historic cost price value. The cost price method is very limiting in Agriculture since most commodities are produced rather than purchased. When reporting on the profitability of a business, the true profit (even if some or all of this profit is unrealised) is more useful than the arbitrary profit calculated using the cost price method. Phoenix only offers the tracking of actual market value of commodities for Commodity reports or when producing the Profit & Loss report.
Selecting Accounts
If a report is to be generated including all accounts, then transactions are included in the report regardless of which account they are recorded for. This issue becomes less clear when transactions affect two accounts; and only one of those accounts is included in the report.
The concept is that the inclusion of an account takes precedence over the exclusion of an account. That is if a transaction is linked between two accounts, and either of the accounts is included from the report, then the transaction is included.
For example, if a profit and loss report is requested on the bank account but excluding the cattle accounts, then any transactions linking the bank account to the cattle (sales and purchases) will be included in the report. Cattle Sales and Purchases will be seen on the report as such. If both accounts are included, then the linked transactions will be seen as part of the Livestock trading summary at the bottom of the report.
Note also that if customer and supplier accounts are recorded, omitting them from a Profit and Loss report will give a cash profit and loss, it will show payments to or from customers and suppliers rather than the invoices recorded.
Selecting Enterprises
Every transaction entered in Phoenix optionally has an enterprise allocated to it. Including an enterprise in the profit and loss report includes all transactions relevant to that enterprise. The default condition is for all enterprises to be included in the report.
Because the enterprise allocation in Phoenix is optional, some transactions may be recorded with no enterprise allocated. These are treated as "unallocated", and may be included or excluded just like any other enterprise. There is an option for unallocated in the enterprise selection list.
Taxation Values
In the Options window in the Profit and Loss report, there is a check box to use taxation values.
Ticking the Use Taxation Values box will cause Phoenix to use the Taxation method or "Cost Price" method for calculating the Livestock Gross Trading Profit. There are a number of issues to be aware of when using this option.
This will only affect the way the Gross Trading Profit is calculated for Livestock accounts. If you are trying to calculate your taxable income, this method will not:
•Change the valuation basis and depreciation calculation of Asset accounts.
•Use Cost Price method for Commodity accounts.
•Separate the livestock into various herds or flocks.
Most Phoenix users choose to record market values for assets and plant. Using market prices will mean that the Net Worth report and Profit and Loss report will yield reliable genuine business position and profitability. However, since these figures are different from the arbitrary figures used for income tax calculation, then these reports will not be reliable for the purposes of estimating income tax liability.
The cost price method is not used for Commodity reporting in Phoenix. Again, this means that Net Worth reports and Profit and Loss reports will yield reliable genuine business position and profitability figures, but not reliable income tax estimation reports.
The Cost Price method when applied to livestock has some unexpected results. In the Profit & Loss report using taxation values, Phoenix treats all livestock accounts together in one report. If you have only one livestock account, or in reporting to the tax office, you treat all livestock as one herd (or flock etc), then this will yield a reliable result. If, however, you report your livestock trading to the tax office in two or more groups (e.g. separating the Stud from the commercial animals, or separating sheep from cattle) then Phoenix’s grouping them together will yield a different result from what you report to the tax office. Unfortunately, because of the arbitrary nature of the cost price method (especially the nominal cost of production for natural increase) reporting several groups together does not give the same profit as the sum of the profits from the individual groups.
