Cash and profit

Notes

Cash and profit

  1. Cash = the value of notes and coins; including bank balances an entity has access to at any point in time

    Cash transactions are accounted for based upon the date of receipt and payment of cash.

  2. Profit is the difference between sales revenue less expenses incurred during an accounting period, which is accounted for on an accruals basis

    This means that transactions are accounted for on the date that they are entered into, which may not be the same as the date of receipt or payment of cash.

P/L might not match the cash increase/decrease

The profit or loss (P/L) for an accounting period will not be matched by an equal increase or decrease in the cash and bank balances of an entity for several reasons:

  1. You sell goods on credit and will receive the payment later on (Example 1)

  2. You buy an asset in cash (Example 2)

An Example 1

A company sells goods on credit for $100. 

When the sale is made, sales revenue of $100 will be recorded in the accounting records. 

However, there will not be an equivalent increase in the cash and bank balances until the customer actually pays for the goods at a later date.

An Example 2

A company purchases new office equipment at a cost of $1,000, paying cash immediately. 

This represents the purchase of a non-current asset and the reduction in the value of another asset (cash and bank balances) by $1,000. 

Therefore, this transaction affects only the statement of financial position and does not immediately affect the profit or loss for that accounting period.

Notes