I have a tax question regarding an S corporation on a cash basis. In 2010 the S corporation received and sold merchandise with a cost of $100,000. The S corporation failed to pay the vendor the cost of the Merchandise in 2010, The S corporation reported the sales $175,000, but not the cost in 2010. In 2011 the vendor got reimbursed by his insurance company. Also in 2011 the insurance company initiated a legal process against the S corporation for the amount paid to the vendor (the insurance client). In 2012 the S corporation signed a document agreeing to pay back to the insurance company the $100,000. Question: When can the S corporation recognized the purchased cost (can this transaction be consider like a loan or credit card purchase) when can I deduct it. When incurred (2008 matching principle), when paid back by the insurance (2011), or when the S corporation signed the repayment note with the insurance (2012)

In accrual accounting the cost is recognised when incurred