Proforum Accountants

PROFORUM ACCOUNTANTS December  05, 2024 As tax Accountants in Zimbabwe, we are often asked the question whether there is a “donations tax” in Zimbabwe or a “tax free threshold” on capital gains tax for donations of immovable property. Donations are not only an important part of corporate social responsibility (“CSR”) for some companies, but they are also an important tax planning tool. This is because there are tax benefits of making donations, provided they fall into certain categories as set out in section 15 of the Income Tax Act [Chapter 23:04] (the “Act”). Some of the categories of donations which qualify as allowable deductions are as follows: 1.      A donation to the National Scholarship Fund; the National Bursary Fund or a charitable trust administered by the Minister responsible for social welfare or the Minister responsible for health; and 2.      A donation to the State or to a fund for any one or more of the following purposes approved by the Minister of Health — a.      the purchase of medical equipment for a hospital operated by the State, a local authority or a religious organisation; or b.      the construction, extension or maintenance of a hospital operated by the State, a local authority or a religious organisation; or In addition to the tax benefit in terms of the Act, in April 2020 the Zimbabwean Government introduced a rebate of duty on essential goods imported for the fight against COVID-19. The list of what is considered an essential good is listen in the Customs and Excise (General) (Amendment) Regulations, Statutory Instrument 88 of 2020. 3.      A donation to a research institution approved by the Higher & Tertiary Education, Science and Technology, subject to a monetary threshold. 4.      Donations to the Public Partnership Fund or the Destitute Homeless Persons Rehabilitation Fund. The law also allows for a rebate on duty for goods donated to charitable organisations and Non- Governmental Organisations (“NGOs”), subject to certain requirements. Accordingly, whilst CSR and donations are important from a moral and social point of view, they are also an important tax planning consideration as they lower the tax burden of the taxpayer. The law is specifically crafted in this manner to encourage taxpayers to participate in social welfare and this is one of the ways that taxation is used to encourage the movement of funds to specific areas with a benefit to society. The point is made, however, that whilst in some countries donations of immovable property are tax free up to a certain value, in Zimbabwe a donation of an immovable property (or any “specified asset” in terms of the Capital Gains Tax Act [Chapter 23:01]) is considered a disposal subject to capital gains tax. Accordingly, we encourage businesses and individuals to speak to their tax advisors regarding donations which they plan to make. What is the implication on tax on the donations by Chivhayo and those receiving the gifts ?

Accruals and prepayments – The accruals (also known as matching) concept of accounts states that the figures shown on the final accounts of a business must accurately represent the financial period they are from.  So the statement of profit or loss must show the income and expenses which were incurred in a period, not necessarily the same as the receipt (income) or payment (expense) made from the business bank accounts in that period.  This makes sense if considered logically. Let’s say that 3 years rent is paid up front for a property. Does this mean there’s no rent incurred in years 2 and 3? The answer is no, we still incur the expense it just means we have already paid for it.  By making adjustments for accruals and prepayments we ensure that the profit/loss figure is representative of the time period in question. What are accruals and prepayments? Accrual: A balance for an expense or income that will be paid/received in the current financial period but was actually incurred in the previous period Prepayment: A payment for an expense or income that was paid/received in a previous financial period but relates to an expense/income incurred in the current financial period What do the general ledger accounts look like? The following are a series of scenarios looking accruals and prepayments for both an expense and income account. In order to make the figures as simple to follow as possible, there are a few assumptions made: Electricity expense is a flat rate of £1,000 per month and will therefore always be £12,000 on the statement of profit or loss for the full year Rental income is a flat rate of £1,200 per month and will therefore always be £14,400 on the statement of profit or loss Bank payments will be made on 31st December (the end of the financial year) There are no opening accruals/prepayments in the current financial year. Scenario one – Accrued balances for Electricity expense and Rental income The first case study has the following information: £10,000 is paid for electricity at the end of 20X5, the remaining balance for the year is not billed until January 20X6 and therefore not paid yet. An accrual of £2,000 therefore exists at the end of the year representing an unpaid expense incurred in the year. An adjustment for this outstanding debt must be made in the ledger account and therefore displayed accurately on the financial statements £7,200 is received from the occupant of the rental property at the end of the financial year. It has been agreed that the other £7,200 will be paid in the following February. The occupant has lived in the property all year and therefore the £7,200 accrual will need to be taken into account when producing the financial statements

Direct Cost and Cost of Goods Sold (COGS) Tracking business expenses is very important for business owners. It allows you to improve money management and monitor the growth of your business, plays a crucial role in calculating profitability, and can help you attract investors. This article covers two key metrics which you should track on a regular basis – direct cost and cost of goods sold (COGS). Direct Cost: What it is and How is it Different vs Variable Cost  Tracking costs is an essential part of the budgeting process and you need to track direct and indirect costs separately. The differences between direct costs and indirect costs are that only direct costs can be applied to producing specific cost objects (products, customers, services, projects or activity). The examples of direct costs include direct materials, direct labor, and manufacturing supplies. The examples of indirect costs are quality control costs, depreciation, and production supervision salaries. Business costs can be variable and fixed. Variable costs vary with the output volume. Variable costs may include wages, utilities, materials used in production, etc. Fixed costs are costs that are independent of output. They remain the same no matter what amount of goods a company produces and can’t be avoided even if no goods are produced. Fixed costs often include rent, advertising, buildings, machinery, insurance, etc. Direct product costs such as raw materials are variable costs. Costs that are direct to a department could be variable or fixed. For example, a supervisor in the painting department would be a direct cost to the painting department. Direct costs and variable costs are similar in nature (direct costs tend to be variable costs). They are both types of costs involved in production. However, fixed costs can be direct or indirect costs. For example, the costs of electricity, gas, phone etc. are fixed indirect costs and salaries paid to employees irrespective of hours worked are fixed direct costs. We will touch upon more useful metrics in the article below. Don’t lose track of any of them and make sure they are aligned in calculation approaches. Use Lean Case to perform the business model calculations.

What is the purchase ledger? The purchase ledger is an account of the suppliers of a business, documenting from whom the organisation has made purchases, what's been paid for, and how much is still owing. This is represented in the annual accounts, balance sheet as accounts payable or, trade creditors.

Financial Reporting is the process of documenting and communicating financial activities and performance over specific time periods, typically on a quarterly or yearly basis. Companies use financial reports to organize accounting data and report on current financial status.

Every business, no matter the industry, revolves around sales. It’s the foundation that drives growth, revenue, and success. If you hate or avoid sales, you’re cutting off the most critical part of your business. How will you bring in customers? How will you generate income?   No department can thrive without sales. Marketing creates awareness, operations fulfill orders, and customer service supports clients—but sales is what closes deals and keeps the business alive. As an entrepreneur, it’s your responsibility to embrace sales. It’s not just a department, but a skill you need to master or hire for. If you aren’t willing to face this head-on, entrepreneurship may not be for you.   Remember, sales are the engine of your business. 

Insightful

Understanding COGS meaning and importance  The meaning of COGS goes beyond a simple calculation.   It reflects the direct cost of producing the goods that a company sells, making it a key figure in determining gross profit and for strategic pricing, inventory management, and operational planning.  COGS provides insights into the efficiency of a company’s production process and supply chain management.   A rising COGS might indicate rising material costs or inefficiencies in production, while a decreasing COGS could suggest improvements in cost control or production processes.  How to find cost of goods sold  Finding the COGS requires accurate record-keeping of inventory levels and purchases.   Businesses should maintain detailed records of inventory purchases, production costs, and inventory counts at the beginning and end of each accounting period.   This data is then used in the COGS formula to calculate the cost of goods sold accurately.  Cost of goods sold strategies  Generally, businesses aim to keep COGS as low as possible without compromising product quality. Here’s why:  Higher profit margins: A lower COGS means you are able to produce your goods at a lower cost, which can lead to higher profit margins when selling products at the market price. This is particularly advantageous in competitive markets where pricing power might be limited.  Operational efficiency: A lower COGS often reflects operational efficiencies, such as more effective supply chain management, bulk purchasing discounts, or technological improvements in production. These efficiencies can contribute to a competitive advantage.  Pricing flexibility: With a lower COGS, a business has more flexibility in its pricing strategy. It can price products competitively to gain market share or choose to maintain higher profit margins.  Financial health: A lower COGS contributes positively to the bottom line, improving a company’s overall financial health. This can enhance the company’s ability to invest in growth opportunities, pay dividends, or weather economic downturns.  However, it’s important to balance efforts to reduce COGS with the need to maintain product quality and customer satisfaction.   Cutting costs too aggressively could compromise product quality and negatively impact brand reputation and sales over the long term.  In some cases, a higher COGS might be strategic or reflect a company’s investment in high-quality materials, superior craftsmanship, or ethical sourcing, which can justify higher selling prices and cater to specific market segments.  Ultimately, the goal is not simply to minimise COGS but to optimise it in a way that supports your business strategy, maintains product quality, and maximises profitability. 

How to calculate cost of goods sold?  Calculating the cost of goods sold involves several components and can vary slightly depending on the accounting method used by the business.   However, the basic COGS formula is a good starting point for understanding how this financial metric is derived.  COGS formula  COGS = (Beginning Inventory + Purchases during the period) – Ending inventory, i.e. goods not yet sold  Beginning inventory: The value of all inventory held by a company at the start of the period.  Purchases: The total cost of inventory purchased during the period, including materials and direct labour.  Ending inventory: The value of inventory remaining at the end of the period.  By subtracting the ending inventory from the sum of the beginning inventory and purchases, businesses can determine the cost of goods that were sold during the period.  Example calculation  If a company starts the year with £5,000 in inventory, makes £2,000 in purchases, and ends the year with £3,000 in inventory, the COGS would be calculated as follows:  £5,000 + £2,000 − £3,000 = £4,000   This calculation shows that £4,000 of inventory was used to produce goods sold during the year.