Profit Does Not Equal Increase in Cash Flow!

As much as interesting accounting is as a subject, it is just as complicated in all its practicality. A field that demands the pursuer to follow a set of rules, accounting has its own vocabulary and understanding that an accountant has to abide by. There are misconceptions that people have regarding various concepts in this field of numbers. One of them is the people mistakenly think that profit in a business automatically leads to cash flow. But more on that later, first novices should be aware of terms used in accountancy. Therefore, here are some of the terms and their distinctions that you ought to be aware about.

Business-and-Consumer-Cash-Flow-Pages

Revenue- one of the most basic terms, Revenue is the amount received by the business from selling their goods or services during a particular period.

Income- this is a loose term used to mean the total earnings of the business. This income can come through various activities of a business.

Profit- a thing that all businesses work for! After deducting expenses from revenues what is left is called Profit. Furthermore there are subsection in profit, namely gross profit and net profit. Gross profit is the amount of revenue from which trading expenses has been deducted. Net profit on the other hand is the amount of revenue that includes incomes from other activities as well as all such expenses has been deducted which were incurred towards main activities as well as other activities.

Besides the above, words like ‘Gain’, ‘Returns’ and many other terms that a pursuing accountant should know about. Coming back to the topic of misconceptions, accountants should also get their facts right. Profit does not in any way equals to cash, not at all! It is imperative to understand that the cash position of the business and the profit do not necessarily go hand in hand. There is a good chance that a profitable business can suffer because of cash flow problems.

Cash flow is basically the movement of money in and out of the company’s bank accounting during a financial period. As mention above profit is income minus expenses, however, transactions not only take place on cash bases, but also on credit. This is where you as an accountant come in; accounting is used to adjust the time difference in recording transactions to reflect the whole genuine picture. An important principle called accruals principle recognizes income when it is earned and recognizes income expenses when they are incurred, not necessarily when money is received or paid out, this permits better calculation and evaluation of actual profits and performance, along with reducing discrepancy from timing mismatch between when cost are incurred and when revenue is realized.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s