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 and sell it for .
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 profit because I reinvested my original and my profit.
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You’re right. Here’s what you have:
Profit and Loss Statement:
Cost of goods sold -30 (1 tire was sold)
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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