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Do you understand your Profit And Loss?

financial reports loss profit May 20, 2022
Your Profit and Loss Statement shows a list of all income and all expenses in a particular date range.
 
If you are running accounting software such as MYOB or Xero, then you should be entering in all of your invoices as soon as they are raised, and the bills when they come in, and then tracking payment dates for each.  This is accounting for the accruals method.  These numbers reflect invoices that have been sent out and not yet paid (Accounts Receivable) and bills that have been received from others that you have not yet paid (Accounts Payable).  These affect your profit and loss statements, as you are accounting for this money even though you do not have the money yet.  This is the preferred method of accounting for your organisation.
 
The other way to report is accounting on a cash basis.  This is more simplistic and is used for smaller organisations that run a cashbook and do not have accounts receivable or accounts payable.  Cash accounting shows the actual cash transactions for a business and does not show outstanding amounts.  Compare the sale of two profit and loss reports – one on a cash basis and the other on an accruals basis.
The timing of the payments of the invoices is very important when understanding the profit and loss statement.  In order to fully understand the organisation’s profit performance, you should read it in tandem with the Balance Sheet.
 
 

Profit is Not Cash

I have never seen a bank account that matches a profit and loss statement.
 
Reasons why:
Cash
  • is used to pay off existing liabilities
Cash
  • is used to pay for new assets
Timing
  • differences – waiting for invoice payments or bills to be paid
GST –
  • Profit and loss is excluding GST but the bank account includes GST
 
There are many variables that change your bank account, that do not always affect your profit and loss statement.  Such things include (but are not limited to): depreciation, interest paid on loans, accounts payable and accounts receivable.  Also, when you buy a new car, if you pay cash, then this does not impact your profit and loss statement, it impacts your balance sheet.  Alternatively, if you arrange finance for a new car, then the payments of the loan will come out of your bank, but the profit and loss is only impacted by the interest you pay, not the whole repayment.
 
The Profit and loss is just one report to run to help make decisions about your business. When running it in conjunction with other reports you can get a better picture of how your business is operating.

This blog is intended to provide general information only and should not be construed as legal or specific tax advice for your circumstances. It is always best to get advice from a professional before you rely on anything you read on the internet.

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