Accounting for Car Dealers
FAS CPA & Consultants
It is hard to achieve your goals in life and business. Automotive dealerships, second-hand car dealers, and dealers specializing in RVs and trucks – even boats – face the expansion of the electric and autonomous vehicle industries. In addition, online vendors are proliferating, and the regulatory environment remains in flux. As a result, strategic planning becomes vital to survive and grow your business, and cognizance of industry-smart services can help you stay ahead of the curve.
Car dealerships face unique accounting challenges.
- For example, sometimes car showrooms use bank finance for their floor plan, and sometimes floor plans are privately financed.
- Transactions typically involve both the collection of interest and the administration of debt.
- There should be an accounting wall between debt payments and interest.
- Clients pay a monthly installment without showing great interest in the debt-interest breakdown.
A client installment of $500 must be split into debt repayment and interest payment.
This is a complicated task best suited to a qualified CPA.
Appointing a CPA specializing in car showroom accounting
Every automotive dealership must develop cost-effective and efficient inventory valuation using a combination of the available methods. A CPA specialist well versed in industry trends, best practices, and legislative updates will consider all the relevant requirements for your auto dealership and establish an inventory strategy suited for your needs.
Optimizing bookkeeping practices to benefit your dealership
Everyone involved with the car dealership, including the owners, management, manufacturers, bankers, investors, and CPAs, expects optimal accounts based on accurate, reliable financial information.
It is the core of the financial statements for a car dealership. Therefore, no month-end should exclude a review of the entire trial balance showing every general ledger account balance.
- At the end of the month, print out the entire trial balance. Working from the top down, consider the following:
- Identify and correct neglected accounts
- Follow every general ledger account from the trial balance to the dealer financial statements.
- Is every balance sheet account supported by a reconciliation, schedule, or supporting statement?
Reconciliations and effective schedules
- Compare your general ledger account balances to source documents, including bank and floorplan statements and finance reserve statements.
- Compare the monthly activity to the source documents.
- Reconcile the source documents to the general ledger balance.
- Take inventory of all the schedules you have.
- Identify missing schedules.
- An unscheduled account distorts the details – so schedule these accounts to improve your vision of the general ledger balances.
- Can you accurately analyze the account balance with the information provided?
- Does it provide adequate aging detail?
- Do I need side-by-side pack liability amounts to clear the picture?
- Who is responsible for reviewing and cleaning every schedule?
- Are all these duties incorporated into the month-end and year-end closing checklists?
- Does team member know their responsibilities?
Car showroom accountants must review expenses monthly. Therefore, before posting financials to management, you should do a deep expense analysis to remedy posting and misclassification errors.
- Compare all expense balances with the average monthly expenses
- Investigate any deviations from the average.
- When you discover any issues, call a meeting with management to discuss the matter.
- Discovering anomalies helps the car dealership to stay ahead of the curve. For example, a proactive review may expose purchases above the capitalization policy that was expensed to repairs and maintenance instead of being capitalized to the balance sheet and depreciated over time.
- Your CPA would likely maintain the dealership’s fixed asset records.
When car dealerships grow, it typically leads to more dealerships and more complicated accounting based on a choice between centralized, noncentralized, or hybrid accounting systems. Centralizing the accounting for all the dealerships under one roof provides specific benefits.
- Corporate governance: Policies and procedures will be uniform and more efficient. It will be easier to implement internal controls and standards.
- Accuracy will improve while fewer employees can do all the work. For example, a single employee at a dealership cannot implement all the controls a central office will introduce.
- Monthly closings will become more organized when all accounting is handled at one location – dashboard reporting will not have to wait for branch reports.
- Since a centralized office will prevent duplication of personnel at various dealerships, it will likely employ fewer people. Lower expenditure will result in better wages and improved skills at the central office.
- Dealerships can reduce administrative costs further by using more technology in the consolidation process.
- Relationships with vendors can improve when vendor billing and payments are consolidated. In addition, communication will improve by sending a single bill to each vendor with a line item for each location.
Consolidation is not without its drawbacks. For example, a lack of accounting support at the store level can raise staffing concerns. This will result in expanded job requirements at the store level to appoint competent individuals to remit the accounting office’s documents and information.
- Dealers must transport documents, papers, and cash between locations. Sometimes the parts driver or overnight courier does this.
- Existing technology might require an upgrade if accounting consolidates. However, despite the benefits of such an upgrade, it might still be costly.
- Every dealership has different accounting needs, so a generic approach won’t do. Instead, consolidation will require careful planning and the development of a customized system.
During the consolidation, all redundant employees can be reassigned or eliminated. Planning is vital whether you decide on a consolidated or hybrid approach. Changes should cause minimum client and employee disruption. Clarity in strategy and communication is essential.
Accounting for Automotive Inventory
Automotive dealerships are inventory-driven enterprises managed by accurately measuring inventories against expenses and revenue using Last-In, First-Out [LIFO], or Specific Identification valuation methods.
- Financial Statements, forecasts, projections, and cash-flow decisions are based on inventory and accounting information.
Inventory accounting methods
- Dealerships have broad discretion in selecting inventory accounting methods.
- Sometimes the methods are adapted and developed for specific purposes.
- Different inventory categories require other accounting methods to accurately reflect the dealership’s income.
- Dealerships employ different methods for new vehicles, used vehicles, and spare parts, and procedures for the same vary from branch to branch or entity to entity.
- Efficient inventory management is not a one-size-fits-all formula.
- Unpredictable supply and demand require tight inventory controls to manage tied-up and available working capital efficiently.
- Tight controls are also a prerequisite for exploring new channels to meet consumer demand that can satisfy the financial and operational needs of the enterprise.
Last-in, First out (LIFO)
Dealerships use LIFO to report lower profits and defer income tax, resulting in lower income tax liabilities.
LIFO requires data collection and clerical work, which is time-consuming and costly. However, the costs should be weighed against the expected deferral of income at the lowered tax rates through TCJA legislation. As a result, multi-entity dealerships with high-volume sales typically derive significant LIFO advantages.
- LIFO assumes that the last item sold will always be the first item sold.
- As a result, more expensive recently purchased vehicles are recorded in Cost of Sales while inventory balance is based on earlier, lower costs.
- Cost and revenue are accurately matched, while material costs are entirely recovered.
- LIFO is a popular method among car dealerships.
- LIFO brings additional tax considerations for C corporations considering an S corporation conversion.
- Exposure to BIG tax [Corporate-Level Built-In-Gains Tax] payable in four installments over four years.
- Potential increase in the Cost of Sales
- Loss of the ability to shift the weight of future tax liabilities and the ability to open cash-flow channels.
Smaller dealerships in periods of low inflation can benefit from LIFO despite reduced inventory. However, with rising inflation and significant reductions in stock, the selection of appropriate inventory methods is critical.
New vehicle alternative LIFO inventory method (ALM)
ALM accounts for inflation on an individual vehicle model level. As a result, it provides the most beneficial inventory valuations.
- Designed for auto dealers using the LIFO method to calculate new car or new light-duty truck inventory values
- Since it requires no annual comparability adjustments, it simplifies dollar-value accounting.
Inventory price index computation (IPIC) method for calculating inflation
Bookkeepers can simplify inventory valuation for car dealerships using the IPIC method to compute inflation for LIFO using the pricing indexes published by the US Bureau of Labor Statistics [BLS]. The car dealerships determine base year prices for opening and closing inventory values. IPIC will often reduce the error margin for inflation calculations because it calculates inflation using the inventory, resulting in lower deductions.
Specific identification method [SIM] car dealership accounting
The SIM is a more accurate valuation method when tracking the actual costs of goods sold against the inventory.
- This is useful for car dealerships that can track inventory items individually using RFID tags and serial or stock numbers.
- The SIM can match cost to revenue very accurately.
- Accountants for car dealerships using this method will typically use cost or market replacement costing methods, whichever is the lowest.
- SIM can simplify the dishonest manipulation of ending inventory numbers to produce tax benefits.
Lower of cost or market (LCM) inventory method
The LCM is especially useful when valuing inventory that can quickly lose value. Stock can be written down in alignment with replacement cost by recording the purchase price or the market value, whichever is lower.
- It assumes that selling prices will fall when purchase prices go down.
- Car dealerships can declare losses for stock sold below net realizable value during the period they occurred.
- Car dealerships can adjust their year-end inventory value:
- Because year-end valuation procedures use average wholesale values for individual items.
- When individual items fall below their recorded cost, the year-end inventory is reduced.
- As a result, the Cost of Sales goes up, and taxable income goes down.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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