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Simple question

Why would profit for say, last year not be equal to the changes in cash balances over the same year?

Its a simple question but its confounded me to no end.

Any help would be hugely appreciated.

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There are many reasons

A quick answer ... every payment does not appear in the P&L (eg. drawings) but some things appear in the P&L that are not payments (eg. depreciation). There are also debtors, creditors, accruals and prepayments to consider, etc.

Look at the accounts, that should answer your question. If you don't understand them then ask your accountant to explain them.

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Don't do that

ShirleyM wrote:
If you don't understand them then ask your accountant to explain them.

If you really have nothing better to do with your time than this, you really should consider either professional help or joining match.com.

According to the latest government opinion, it is all just a big scam cooked up by us accountants to keep us in fees. People would have a much better understanding of their business finances if it were not for us confusing matters with our depreciation & accruals.  

 

 

 

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lol

@Roland

Are there any rational people who believe what the government (politicians) tell them ;)

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Heh

ShirleyM wrote:

A quick answer ... every payment does not appear in the P&L (eg. drawings) but some things appear in the P&L that are not payments (eg. depreciation). There are also debtors, creditors, accruals and prepayments to consider, etc.

Look at the accounts, that should answer your question. If you don't understand them then ask your accountant to explain them.

Thank-you very much Shirley. You said that certain things would not appear on a profit and loss account and certain things might not show up as actual flows. Could I trouble you for further examples other than drawings and depreciation? Sort of new to this accounting lark and it would seem everyone here is very knowledgeable (good old ego stroking).

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I'm not into teaching, Russs

Here are a couple of examples:

Loan/HP repayments

Purchases of fixed assets

 

 

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Thank-you

Sorry for wasting your time and again, thank-you.

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You haven't wasted my time!

I enjoy helping people, but what you are asking for cannot be given in a forum answer. 

Forgive me my comments ... I am an outspoken (and blunt) Yorkshire woman ;)

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Funds flow statement

That's what a funds flow statement is supposed to tell you, reconciling the profit & loss account with the movement in assets.

Mind you, most are just as difficult to follow as the rest of the financial statements.

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It is worth pointing out that that in time then yes cash = profits, so if you look overall at the life of a business then it will happen, but if looking at any period such as a week/month or year then chances are cash and profits will have only a weak correlation.  The discrepancies depend on what type of business it is.  A fruit and veg market stall would probably be about right just looking at cash as you buy the stock in the morning, everyone pays cash, and whats not sold by late afternoon goes in the skip, but even then they may pay their suppliers on credit and have a van etc which complicates matters.  Something like a retail shop with lots of stock or a factory is very unlikely to have much correlation at all which is why the bookkeeping/accounting is important to get a proper understanding of what it going on.  Its quite possible for a profitable business to eat cash if growing and has a big cash cycle, and a loss making one to have positive cash flow if for example selling off stock, so looking just at cash is very dangerous game to play.

I hope that helps in your studies.

 

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So essentially...

Haha ok Shirley I just misunderstood, and dont worry, from the south east myself.

 

So essentially, profit and loss accounts include expenses and stuff for a period, that period might involve certain expenses which are unpaid for example - debtors, which could account for at least some of the discrepancies between cash and profit?

 

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Not quite!

Trade debtors are unpaid sales (receipts not yet received), but your comments do apply to purchases and trade creditors.

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