Stock purchase Ltd company tax requirements

L

letin

Registered User
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Hi,
My Ltd company has a cash balance of €50k, in Feb 2018 the company purchased €32k of stock. Therefore case remaining in the bank account is €18k at the end of the year.

No stock has been sold to date.

Do I pay corporation tax on €18k remaining in the business account? Or do I have to pay tax for the full €50k inclusive of value of stock purchased?

Any insight very much appreciated.

Thanks

Letin
 
Hi Brendan, thanks for the reply. To confirm I should only be paying corporation tax on the funds remaining? Ie €18k?. Reason I ask is my current accountant believes I should be paying corporation tax on the full €50k?

Thanks again
 
letin said:
Hi Brendan, thanks for the reply. To confirm I should only be paying corporation tax on the funds remaining? Ie €18k?. Reason I ask is my current accountant believes I should be paying corporation tax on the full €50k?

Thanks again
Click to expand...
Your accountant is right.
Cash has nothing to do with it. You pay tax on profit. If the 50k was profit, that's what you pay tax on.
 
Corporation tax is paid on the profit made by the company. The amount of cash and stock has nothing to do with the tax paid - you need to see the Profit & Loss Accounts to establish how much tax is paid. If the € 50,000 represents the profit you made in the year, then the € 50,000 is taxable. It doesn't matter what you do with it - keep it in the company bank account, keep it as cash, buy stock, ...
 
Thanks for the replies. Thought it would have be deemed an asset to the company, but also an expense. So should not be liable for tax until sold. Somewhat on the same lines as purchasing a company car, or expenses spent in order to do business.
 
RedOnion said:
It's one or the other. Can't be both.

I'd suggest you leave the accounting & tax to your accountant.
Click to expand...

Actually, it is both!

The accounting entry on purchase is along the lines of:

Debit - Purchases (a P&L expense)
Credit - Creditors/Bank (reducing the Balance Sheet)

Then if the stock hasn’t been sold you have the following effect in the closing stock balances:

Credit - Closing Stock (P&L - Cost of Sales)
Debit - Stock Current Asset (Balance sheet)

So overall, if you buy stock at the end of the year, in general it has no overall effect on the net Profit/Loss (since there are corresponding debit & credit entries in the Cost of Sales part of the P&L), nor on the Balance sheet (since you have effectively merely changed X amount of your current asset value from cash to stock).
 
Doesn't seem right

If you purchase stock, does it not enter directly to your inventory (a Balance sheet account)?
It only becomes a P & L item when you sell the stock and the cost is transferred to a Cost of Sales account?
 
jpd said:
Doesn't seem right

If you purchase stock, does it not enter directly to your inventory (a Balance sheet account)?
It only becomes a P & L item when you sell the stock and the cost is transferred to a Cost of Sales account?
Click to expand...

Your P&L cost of sales includes the movement on stock (Opening Stock - Closing Stock).
 
torblednam said:
Actually, it is both!
Click to expand...
I think in the context of the OPs question, if we look at the net position, are we agreed that there's a net Zero in his 'expenses', and he has an asset on his balance sheet at year end?

There are different ways of doing the book keeping, but the net effect is the same.
 
RedOnion said:
I think in the context of the OPs question, if we look at the net position, are we agreed that there's a net Zero in his 'expenses', and he has an asset on his balance sheet at year end?

There are different ways of doing the book keeping, but the net effect is the same.
Click to expand...

Absolutely!
 
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