January 16, 2020

Cash based Profit and Loss for Small Businesses

Naveen Shayan

LedgerMax specialist

Small business owners are usually pretty much acquainted with cash based accounting. The cash based profit & loss is equivalent to the cash a business gets from its sales deducting its cash expenditures in an accounting period. A business accounts its expenses, sales and profit or loss (cash based) on its income statement or P&L statement.

However, as a matter of fact, this cash-basis P&L statement does not follow the general accounting rules and thus, is mostly used by only those small businesses that do not involve external parties for reporting.

Sales Proceeds

Sales proceeds adds profit and diminishes loss. The sales income reported by a business on a cash basis P&L statement is only comprised of the cash earned by selling its services or products. So, if a company executes a sale and wishes to acquire the payment at a far along date, it will report the income after collecting the payment only. For instance, if during a quarter, your small business sells Rs.100,000 in products; however, collects Rs.90,000 only from the customers, your business will report Rs.90,000 on your cash based P&L statement.

Cost or Expenses

Cost or expenses lessens profit and adds to the loss. On a P&L statement, the expenses only comprise of the ones for which the business has spend in cash. So, if a business bears an expense; but can pay for it on an advanced date, that expense ��would be deducted from the current declaration. For instance, during a quarter, your small business spends Rs,50,000 in expenses. So, if you pay cash for just Rs.40,000 of expenses and choose to pay the outstanding Rs.10,000 during the subsequent quarter, your business will report Rs.40,000 in expenses throughout the present quarter.

Profit or Loss Declaration

The profit or loss is generally reported by a business at the bottommost of the income statement. The net income or profit is a positive amount and denotes that the cash collected by the business gets an upper hand over the cash expenditures. On the other hand, a loss is a negative amount signifying that the expenses have predominated the cash collections. For instance, if your company has Rs,100,000 in cash collections while Rs.70,000 in expenditures on its P&L statement (cash-basis), this denotes a Rs.30,000 profit.So, categorically, cash-based profit & loss statements are integral part of a small business�۪s accounting cycle. Businesses that use accounting software like LedgerMax for their bookkeeping requirements can automatically obtain their P&L statements without going through any hassle.

LEDGERMAX BLOG

Our Featured Blog Posts

February 14, 2024
Inventory management is a critical aspect of small and medium-sized enterprises (SMEs) in Pakistan, impacting their financial performance and operational efficiency. Among the various inventory costing methods available, SMEs often face the challenge of selecting the most suitable approach to meet their unique needs and objectives.
Read more
December 20, 2023
In recent years, Pakistan has undergone a striking metamorphosis in its retail dynamics, owing to the meteoric rise of e-commerce. The landscape, once confined to niche segments, has blossomed into a thriving industry, fundamentally altering the business landscape and revolutionizing consumer shopping habits. Beyond mere convenience, this transformation embodies a profound shift in how consumers
Read more
December 20, 2023
In an increasingly digital world, establishing a robust online presence has become a fundamental imperative for small businesses in Pakistan. The internet provides an expansive platform for reaching a wider audience, enhancing brand visibility, and increasing sales. This article serves as a comprehensive guide for Pakistani small businesses, offering step-by-step insights and strategies to build a strong online presence.
Read more