I have been trying to find an answer to a question here, but cannot seem to find the solution.
I am reslling items on eBay and using cash basis accounting. Typically what happens is I will buy stock - lets say 50 items. I would make an invoice for the total amount under “General Purchases” code and list all items bought in the description.
When I create a P&L report (cash basis) all my General Purchases appear on it, even though my understanding is that I cannot claim purchase price of the item until its sold? So it looks like all the stock I hold is being put under General Purchases. Would I need to make some kind of journal adjustment to deal with this?
If you’re completing your tax returns on cash basis then you don’t make stock adjustments - you claim the full cost of the stock as an expense in the year when you paid for it, and you treat the full income from selling the items as turnover in the year when you were paid by the customer who bought each item. That’s the point of cash basis, it is designed to simplify your record keeping.
However, if you hold lots of stock then you might be better off not using cash basis accounting and instead switch to the more traditional method of apportioning your purchases to the year in which each item was sold. For example if you make a big purchase of stock and the effect of expensing it all in one year is enough to push your net profit below the income tax personal allowance threshold then you might end up paying more tax overall, compared to if you were able to fully use up your personal allowance in every year.