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Beyond the Numbers / The Language of BusinessHandout · Page 1 of 2
What changes profit and cash
01Everyday sales and expenses
A business can show a profit and still have an empty bank account, because profit and cash don’t always move on the same day. For anything that happens, ask two questions.
- Goes up
- Goes down
- No change
| What happens | When | Cash | Profit | Why |
|---|---|---|---|---|
| Sales | ||||
| You finish a $300 job and the customer pays on the spot. | This month | Up ↑$300 | Up ↑$300 | You earned the sale and got the money on the same day. |
| You finish a $300 job and send an invoice. The customer pays next month. | This month | No change | Up ↑$300 | The sale counts when you do the work. The money comes later. |
| The customer pays that $300 invoice. | Next month | Up ↑$300 | No change | You already counted this sale. Don’t count it again. |
| Bills | ||||
| You use $150 of electricity and pay the bill this month. | This month | Down ↓$150 | Down ↓$150 | The expense and the payment land in the same month. |
| You use $150 of electricity. The bill isn’t due until next month. | This month | No change | Down ↓$150 | The expense counts when you use the power, not when you pay. |
| You pay that $150 electricity bill. | Next month | Down ↓$150 | No change | You’re paying a bill you’ve already counted, not adding a new expense. |
| Paid in advance | ||||
| You pay $1,200 for 12 months of insurance, starting this month. | This month | Down ↓$1,200 | Down ↓$100 | All the cash goes now. Only this month’s cover is an expense. |
| Another month of that insurance goes by. There’s nothing more to pay. | Each of months 2 to 12 | No change | Down ↓$100 a month | The expense carries on. The cash left earlier. |
| A customer pays a $500 deposit for a job you’ll do next month. | This month | Up ↑$500 | No change | You have the money, but you haven’t earned the sale yet. |
| You finish that $500 job. The deposit covered it in full. | Next month | No change | Up ↑$500 | Now it’s a sale. The money arrived earlier. |
Read one row at a time. Each row shows what that one event does on its own, with no other costs involved. It isn’t the result for the whole business.
Sales and expenses are counted when they happen, not when they’re paid (accrual accounting). GST is left out. The figures are examples. Cash means money in the business bank account or till.
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Beyond the Numbers / The Language of BusinessHandout · Page 2 of 2
What changes profit and cash
02Stock, equipment, loans and the owner
Not every payment is an expense, and not every dollar that comes in is a sale. These are the ones that catch people out.
- Goes up
- Goes down
- No change
| What happens | When | Cash | Profit | Why |
|---|---|---|---|---|
| Equipment | ||||
| You buy a $12,000 machine and pay for it. | When you buy it | Down ↓$12,000 | No change | You’ve swapped cash for something you’ll use for years (an asset). It isn’t an expense on the day. |
| The machine wears out a little each month: $200 of depreciation. | Each month, once it’s ready to use | No change | Down ↓$200 | A slice of the machine’s cost becomes an expense. There’s no new payment. |
| Stock | ||||
| You buy $1,000 of stock and pay for it. None of it has sold yet. | This month | Down ↓$1,000 | No change | Unsold stock is still yours (an asset). Its cost isn’t an expense yet. |
| You sell stock that cost you $600 for $1,000 cash. | When it sells | Up ↑$1,000 | Up ↑$400 | The $1,000 sale less the $600 cost of what you sold adds $400 to profit. |
| Loans | ||||
| A $10,000 business loan lands in the bank account. | When it arrives | Up ↑$10,000 | No change | Borrowed money is cash you owe back. It isn’t a sale. |
| You repay $500 of the loan itself (the principal). | When you repay | Down ↓$500 | No change | You owe less. Paying back what you borrowed isn’t an expense. |
| You pay $50 of interest on the loan for this month. | This month | Down ↓$50 | Down ↓$50 | Interest is the cost of borrowing, so it is an expense. |
| The owner and tax | ||||
| You put $2,000 of your own money into the business. | When you put it in | Up ↑$2,000 | No change | The owner’s money is funding, not a sale. |
| As a sole trader, you take $300 out for yourself (drawings). | When you take it | Down ↓$300 | No change | Drawings are you taking out your own money. They aren’t wages or an expense. |
| A company pays a $1,000 income tax bill for last year. | When it’s paid | Down ↓$1,000 | No change | The tax was counted as an expense last year. This pays the bill. |
Depreciation starts in the month the machine is ready to use, which can be the month you buy it. The cost of stock becomes an expense when the stock is sold.
The drawings row is for sole traders. Paying yourself from a company works differently. What you can claim for tax (deductions and instant asset write-offs) follows its own rules, so check those with your accountant.
For the accountants: accrual basis; AASB 102 para 34, AASB 116 para 55, AASB 107 para 17.
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Want to practise this? What happens to profit? walks through the first few rows with Jess’s salon.