Cash Basis - Stock Damages

[JoshWinnard]

If I'm using cash basis accounting and I buy some stock, claim it as an expense and it gets damaged, would it still classed be an expense? I've seen some answers to this but it doesn't quite make sense to me, so I'll put a basic example to try and explain how I'm looking at it.

I start a business and sell an item that cost me 1000 for 3000. I then spend the 2000 profit on another item (claiming the 2000 spent on the the item as an expense) but it gets damaged and becomes worthless.

Would I just be at a 2000 loss and straight with hmrc? Also, if say I was given a 2000 refund if it had been damaged in transit etc, but the expense had already been claimed, what would happen then, because I'd have ended up with the 2000 profit without paying any tax? Or would the refund just be added to the gross income?

I imagine there's a straightforward answer or I'm just being daft, but I haven't seen anything that mentions this sort of scenario.

Thanks!

 

[numbersrule]

In the scenario where the 2000 Item is damaged in your possession and is effectively your responsibility then assuming there is no insurance to cover a replacement then essentially the business takes the hit and incurs a loss on the item. In this first scenario this would mean that you would have spent the 2000 out of the business cash and it would be recorded as Cost of Goods Sold but you wouldn't have a sellable Item. However, in Cash Basis, you would not normally record Stock as an Asset, so there would be no write down of the loss, instead you would have lost the opportunity to sell the Item on. But the expense has been incurred and you are all square at 3000 and 3000 with no profit and no tax incurred. So you have lost 2000 because that is what it would cost to reinstate your position as having a 2000 item to sell for some unspecified profit.

In the second scenario where the item is lost in transit, then initially you have incurred the expense / cost of goods but you don't have an item so the refund simply credits back the expense / cost of goods and you are back in your original position having made a 2000 profit by selling the first 1000 item for 3000 and then tax is incurred on the 2000. But you have your refund so you can buy the 2000 item again.

 

[JoshWinnard]

In the scenario where the 2000 Item is damaged in your possession and is effectively your responsibility then assuming there is no insurance to cover a replacement then essentially the business takes the hit and incurs a loss on the item. In this first scenario this would mean that you would have spent the 2000 out of the business cash and it would be recorded as Cost of Goods Sold but you wouldn't have a sellable Item. However, in Cash Basis, you would not normally record Stock as an Asset, so there would be no write down of the loss, instead you would have lost the opportunity to sell the Item on. But the expense has been incurred and you are all square at 3000 and 3000 with no profit and no tax incurred. So you have lost 2000 because that is what it would cost to reinstate your position as having a 2000 item to sell for some unspecified profit.

In the second scenario where the item is lost in transit, then initially you have incurred the expense / cost of goods but you don't have an item so the refund simply credits back the expense / cost of goods and you are back in your original position having made a 2000 profit by selling the first 1000 item for 3000 and then tax is incurred on the 2000. But you have your refund so you can buy the 2000 item again.

Yeah that makes sense! Thank you