WHERE’S MY PROFIT? IT’S NOT IN THE BANK!


This is a question that is asked regularly by clients of Your Tax Shop, Tameside. Usually, this question comes up when discussing end of year accounts and clients believe any profits made should be reflected in their bank balances.

Before we explain why profits are not always represented by money in the bank, we need to explain what “profits” are. Profits are the difference between sales and business expenditure.

For example, Carol, who runs a small shop selling shoes started her business by introducing £5,000 of her own money and at the end of her first trading year a summary of her results are as follows:

  • Sales £100,000
  • Goods purchased and sold in the year £60,000
  • Other expenses paid for in the year £15,000
  • Stock at end of year valued at cost £7,000
  • Drawings for personal use £16,000
  • Bank balance £7,000

Carol’s accounts show profits of £25,000 (This is made up of sales of £100,000, less cost of goods sold of £60,000 and less other expenses of £15,000).

So why, Carol asked, is there only £7,000 in the business bank account if my profit is £25,000?

This is because over the year Carol had withdrawn £16,000 for her own private use and has purchased £7,000 of stock that was unsold at the end of the year. We also need to consider that Carol had introduced £5,000 of her own cash when the business started.

The reconciliation of her profit and the bank balance is therefore: Profit for the year £25,000, less personal drawings £16,000, less stock £7,000, plus own capital introduced £5,000, equals £7,000 – the business bank balance.

We can conclude from this explanation that to reconcile profit and cash flow you need to factor in receipts and payments that are not considered when calculating profit. In Carol’s case: capital introduced, stock at the end of the year, and personal drawings.

Should you require any further information about profit figures please contact one of the team at Your Tax Shop in either Mossley or Ashton-Under-Lyne.

WHERE’S MY PROFIT? IT’S NOT IN THE BANK!


This is a question that is asked regularly by clients of Your Tax Shop, Tameside. Usually, this question comes up when discussing end of year accounts and clients believe any profits made should be reflected in their bank balances.

Before we explain why profits are not always represented by money in the bank, we need to explain what “profits” are. Profits are the difference between sales and business expenditure.

For example, Carol, who runs a small shop selling shoes started her business by introducing £5,000 of her own money and at the end of her first trading year a summary of her results are as follows:

  • Sales £100,000
  • Goods purchased and sold in the year £60,000
  • Other expenses paid for in the year £15,000
  • Stock at end of year valued at cost £7,000
  • Drawings for personal use £16,000
  • Bank balance £7,000

Carol’s accounts show profits of £25,000 (This is made up of sales of £100,000, less cost of goods sold of £60,000 and less other expenses of £15,000).

So why, Carol asked, is there only £7,000 in the business bank account if my profit is £25,000?

This is because over the year Carol had withdrawn £16,000 for her own private use and has purchased £7,000 of stock that was unsold at the end of the year. We also need to consider that Carol had introduced £5,000 of her own cash when the business started.

The reconciliation of her profit and the bank balance is therefore: Profit for the year £25,000, less personal drawings £16,000, less stock £7,000, plus own capital introduced £5,000, equals £7,000 – the business bank balance.

We can conclude from this explanation that to reconcile profit and cash flow you need to factor in receipts and payments that are not considered when calculating profit. In Carol’s case: capital introduced, stock at the end of the year, and personal drawings.

Should you require any further information about profit figures please contact one of the team at Your Tax Shop in either Mossley or Ashton-Under-Lyne.

WHERE’S MY PROFIT? IT’S NOT IN THE BANK!


This is a question that is asked regularly by clients of Your Tax Shop, Tameside. Usually, this question comes up when discussing end of year accounts and clients believe any profits made should be reflected in their bank balances.

Before we explain why profits are not always represented by money in the bank, we need to explain what “profits” are. Profits are the difference between sales and business expenditure.

For example, Carol, who runs a small shop selling shoes started her business by introducing £5,000 of her own money and at the end of her first trading year a summary of her results are as follows:

  • Sales £100,000
  • Goods purchased and sold in the year £60,000
  • Other expenses paid for in the year £15,000
  • Stock at end of year valued at cost £7,000
  • Drawings for personal use £16,000
  • Bank balance £7,000

Carol’s accounts show profits of £25,000 (This is made up of sales of £100,000, less cost of goods sold of £60,000 and less other expenses of £15,000).

So why, Carol asked, is there only £7,000 in the business bank account if my profit is £25,000?

This is because over the year Carol had withdrawn £16,000 for her own private use and has purchased £7,000 of stock that was unsold at the end of the year. We also need to consider that Carol had introduced £5,000 of her own cash when the business started.

The reconciliation of her profit and the bank balance is therefore: Profit for the year £25,000, less personal drawings £16,000, less stock £7,000, plus own capital introduced £5,000, equals £7,000 – the business bank balance.

We can conclude from this explanation that to reconcile profit and cash flow you need to factor in receipts and payments that are not considered when calculating profit. In Carol’s case: capital introduced, stock at the end of the year, and personal drawings.

Should you require any further information about profit figures please contact one of the team at Your Tax Shop in either Mossley or Ashton-Under-Lyne.