We have a sheep farm. We paid $47000 in Nov 2011 to purchase more sheep to breed more lambs. Is it right that our accountant has added the $47000 to our taxable income for the 2011 2012 year. Their explanation is 'at year end they are stock on hand and therefore a profit waiting to be made. They are then brought in as income to offset the expense you claimed for the purchase'

Where did the money for sheep come from? Was it money that the business had in the bank ? Was it a loan ? Or personal money transferred into the business

You may need to have the accountant explain that again, because counting an expense as income makes no sense.

I think I am a little confused like the others, but I will offer a couple of comments.

If the sheep had been bought for resale then they could have been treated as inventory which has the effect of adding them to income.

However, you state they were purchased as breeding stock which indicates that the inventory treatment would be incorrect. Breeding stock is subject to depreciation rules, similar to machinery and equipment, and all the advantages and disadvantages that come with it.

I agree wirh MLSNC, except that if they had been bought for resale they would be held as inventory instead of taken as an expense, which does not add them to your income. It just does not subtract them from your income.