How to manage the accounts of a car dealership

A vehicle is a stock unit with its own cost

In spare-parts trading the weighted average works because units are identical. A vehicle is valued by specific identification: each VIN has its own cost. Landed cost = purchase price + shipping + customs + insurance + preparation (servicing, detailing, tyres). All of these are capitalised onto the vehicle rather than expensed, and become cost only when it sells.

The accounts a dealership needs

• Vehicle inventory (asset), detailed per VIN in the system.
• Vehicles in transit (asset), for cars paid for but not yet arrived.
• Customer deposits (liability), amounts collected before the sale.
• Financier receivables (asset), amounts due from banks and finance companies.
• Cost of vehicles sold (expense) and vehicle sales (revenue).
• Output and input VAT, and sales-rep commissions (expense).

The entries across a vehicle’s life

1. Purchase and additional costs

Buying a car for SAR 80,000 plus 12,000 VAT: debit Vehicle inventory 80,000 and Input VAT 12,000; credit Supplier 92,000. Then shipping of 3,000: debit Vehicle inventory 3,000; credit Bank 3,000. The vehicle’s cost is now 83,000.

2. The deposit

The customer pays a 5,000 deposit: debit Bank 5,000; credit Customer deposits 5,000. The vehicle becomes reserved and is withdrawn from sale.

3. The sale with a trade-in and financing

Sale price 100,000 plus 15,000 VAT = 115,000. A trade-in appraised at 20,000, and the rest financed by a bank after the deposit. The entry: debit Customer deposits 5,000, Vehicle inventory (the trade-in) 20,000 and Financier receivable 90,000; credit Vehicle sales 100,000 and Output VAT 15,000. Then the cost entry: debit Cost of vehicles sold 83,000; credit Vehicle inventory 83,000. Gross profit on the deal is 17,000 before commission.

4. Collecting from the financier and the commission

When the transfer arrives: debit Bank 90,000; credit Financier receivable 90,000. And the rep’s commission of 1,000: debit Sales commissions 1,000; credit Accrued commissions 1,000.

VAT in dealerships

Sales of new and used cars are subject to 15% VAT on the sale price, with a standard invoice for companies and a simplified one for individuals under e-invoicing requirements, carrying the VIN and specifications. For the profit-margin scheme that applies to certain eligible used-car sales, consult the authority’s guideline and your accountant before applying it.

The reports a dealership owner needs

• Profit per vehicle: sale price minus landed cost minus commission.
• Stock age: how many days each car has sat on the lot, because a stagnant car ties up capital.
• Open deals: deposits not yet completed, and financier transfers not yet received.
• The monthly income statement and the VAT report.