There are multiple sets of rules for when to claim income and expenses on your tax return.
Most common - small businesses are cash basis taxpayers and report their business income in the year they receive it and their business expenses in the year they pay it, whether it is paid by cash, check or credit card. They would not deduct their credit card payments in later years, because they have already deducted the expense.
Less common - accrual basis taxpayers who report their income in the year they earn it (bill it) and report their expenses in the year they incur the expense, even if they pay for it in a later year.
There are exceptions to these rules and inventory is one exception. Businesses that have sales of less than $1 million are exempt from accrual basis reporting requirements, but no business can deduct inventory (cost of goods sold) that is not sold by the end of the year. Whether the business is cash basis or accrual basis, cost of goods sold must be adjusted for beginning and ending inventory.
Example - I started a business last year, and purchased 600 $1 items to sell. I sell 300 items for a total income of $900 by the end of the year. I will report $900 income and $300 of cost of goods sold for the year. (For cost of goods sold calculation I report purchases of $600 less ending inventory of $300).
