Credit Card and Loan Debt in Profit Calculation For Taxes

[downtowndave]

My wife runs a small gift shop as a sole-proprietor, she has purchased inventory using a business credit card and I'm unsure how it should be handled in calculating profit for tax purposes. She uses cash accounting because she does everything herself. So here is a hypothetical simplification of the scenario.

If she started the year with $10k in inventory and at the end of the year she has made $100k in sales, spent $50K cash and $10k credit on inventory, spent $50k on salary and business expenses and she has $20K of inventory on the shelves, does the credit card debt wipe out the additional inventory on the shelf to break even? Or does she have to pay taxes on $10k increase in assets, but can write off the payments to the credit card as she makes them in future years?

Since she hasn't paid off the credit debt we don't know how to include it in the cost of goods calculation for calculating her yearly profit for tax purposes or where to place the debt to remove it from profits.

Sorry if this is a dumb question, also this is a simplification and I know the finances don't look great, just trying to figure out how to deal with the debt in terms of calculating her earnings. It's the second year in business and while I want it to be successful, come tax time loosing money or breaking even sounds fine for now.

David

[turboguy]

Beginning Inventory $ 10,000.00
Purchases cash 50,000.00
Purchase Credit 10,000.00
Total 70,000.00

Minus Inventory on hand 20,000.00

Cost of goods sold 50,000.00

Profit 00.00

She can write off the interest expense on the credit cards.

Basically she had 10 grand in inventory, purchased 60 grand in cash and credit which totals 70 grand. She has 20 grand left so you deduct that meaning the goods she sold cost her 50 grand

She took in 100 grand and paid out 50 grand which leaves 50 grand which was the cost of the goods she sold.

[downtowndave]

Thank you, I didn't know that spending on a credit card counted as "spending" money in terms of the accounting. I guess I assumed you didn't technically have an expense until you pay it back from your checking account, but this makes sense.

If purchasing via credit counts as spending money when you make the purchase (rather than when you make the payment) I assume that means when you make payments down the road you only count the interest paid as a new expense and not the principal, right?

[turboguy]

That is correct.

Actually when you are dealing with inventory I believe you are supposed to be using an accrual accounting method.

[jamesray50]

When you use a credit card to purchase something you are making a payment on the purchase of goods. The method of payment is a credit card rather than cash, check, debit, etc.