Tired Profits

Today TaxMama hears from Frank in Boardman, OH who wants to settle a bet, “I’m trying to resolve a dispute. Let’s say I have a company selling tires. I buy a tire for $30 and sell it for $60. My stance is I made $30. Now I take the $60 and buy two tires. I contend that I’ve still only made $30. My friend contends I now have $60 profit because I reinvested my original $30 and my $30 profit. Who’s right?”

Hi Frank.

You’re right. Here’s what you have:

Profit and Loss Statement:

Sales $60
Cost of goods sold -30 (1 tire was sold)

__
Profit $30

Balance Sheet:

Assets:

Inventory $60 (2 tires)

Total Assets = $60

Loan from owner -$30 (to buy the first tire)

Retained Earnings -$30 (equals your profit)

Total Liabilities and Equity $60

Your accounting lesson for the day. Collect your winnings!

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