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 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.