Inventory adjustment + effect on balance sheet

[Robot]

Say we have an extra 100 000 in profit just before year end in February. Can we spend that 100 000 on inventory to reduce our cc income tax for the year ?

How will this affect our balance sheet ?

Where do i go in pastel to do inventory adjustments for things like missing inventory etc ?

[Justloadit]

Buying stock, is not an expense!

In fact it is still seen as profit, because if you did not have the money, you could not have bought the stock in the first place. You will note that any decent balance sheet has a stock figure which falls under the positive side of of the balance sheet, increasing profit made. This is the reason that stock take on the last financial day of a company year end is so important, it gets added to the balance sheet as profit. Having no money in the bank does not constitute a badly run company, the profit may be sitting in stock, ready to be sold and convert the stock into liquid (Cash) and hopefully pay the expenses and leave a little left over, so we can call it a profit.

[Robot]

how is company income tax calculated then ?

[Dave A]

Say we have an extra 100 000 in profit just before year end in February. Can we spend that 100 000 on inventory to reduce our cc income tax for the year ?

How will this affect our balance sheet ?

You'll just be moving cash into inventory, both of which are balance sheet accounts - it isn't going to affect your tax situation as it doesn't affect your taxable profits. Realistically it's better to keep it as cash if you don't need the inventory.

If you are looking at pulling down the profits some to save tax, one area to look would be any capital expenditure which you're considering spending in the next few months anyway and you could expense immediately in terms of allowable depreciation (select no. 47). Currently the threshold for small items that can be depreciated immediately for tax purposes is R7 000.00 so something like a computer could fit the bill.

[Dave A]

how is company income tax calculated then ?

I tried making a short post along the lines of

1. Calculate your taxable profit = income - allowable expenses
2. Profit x 28% = income tax

but there's just far too many exceptions.

Here's SARS's current tax guide for small businesses 2010/2011.
If your turnover is under R1 million per annum, then the tax guide for micro businesses might be more relevant.

[Robot]

Thanks Dave , this year end is the first year we are above the VAT threshhold of 1000 000. So we need to back pay sars for the whole year + income tax. So im trying to reduce the damage as much as possible

[Dave A]

Ouch! Not only tax cost wise; that sounds like a lot of work.

Congratulations on making a profit in your first year of trading. Hopefully the tax man won't wreck that success.

[Dave A]

Given you're going onto VAT, one thought did strike me that's perhaps worth pointing out - you can claim the input VAT back on your inventory purchases in the same period you bought the inventory.