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Cash Flow Learning Trail
Part 5: Why Cash Flows Statements and Profit and Loss Accounts Differ
As we stated in Part 1, Cash Flow Statements do not show the profitability of a business, they show either an historic view, or a prediction of the flows of cash into and out of the business. It is only a Profit and Loss Account that tells us about profitability of a business.
But why is this? After all, many if not most of the features are the same. They both show income, they both show expenses. So why is not the bottom line on the Profit and Loss Account the same thing as the Net Cash Flow? The answer is quite simple, the figures included in each are similar but they are not identical. The table below gives details of the main differences between the
two, showing how the main differences arise, and why profit and loss accounts and cash flows are in fact quite different financial animals.
| |
Cash Flow |
Profit And Loss Account |
| Sales |
Income from sales is entered as it is received, not before. If a credit sale is made, the income is only entered when the actual bill is paid. |
Sales are applied to the accounting period in which the sale occurs. So a good sold in one period on credit, is entered as a sale for that period, even though the payment may not be due until the next accounting period. |
| Expenses |
Entered as paid. |
Provision is made in accounts for expenses incurred but not yet paid, these are known as accruals. |
| Depreciation |
As depreciation is a paper accounting transaction, not involving actual expenditure, this is not shown. |
Depreciation is shown as a business expense. |
| Capital Inflows |
If a business receives a further injection of capital that has not arisen from its trading activities then this is shown as a type of income. |
This account will only show an inflow of capital that has arisen as a result of trading activity. |
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