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January 04, 2017 | Posted in:

I Made a Profit… Now Where is it?

One of the great mysteries of the accounting world is the disappearance of the company profits into thin air. Too many times to count I’ve heard the statement “I shouldn’t have to pay tax, I couldn’t have made a profit, and there’s nothing left in the bank!”

The basic formula is as follows: sales, less cost of sales, less operating expenses, equals net income, times the tax rate, equals taxes. It would be easy if every year started with zero in the bank and what was left represented the profit. It’s never that simple, and here are some of the reasons why.

A cash basis profit calculation will almost always have a different result than an accrual basis calculation because accounts receivable are uncollected and accounts payable are unpaid at the end of each year. The company owners may have drawn more cash than the amount of the profits. There may have been a pay down of debt borrowed in a prior year. The cash received in that prior year from the original borrowing was likely deducted as an expense in that prior year when it was originally borrowed.

Another explanation is that capital expenditures are not fully deducted in the year of the purchase but instead depreciated over a prescribed period of years. This can result in income in the year of the purchase, the amount of which is represented by the future depreciation deductions.

However, there’s a benefit of future years’ depreciation deduction not requiring cash to be spent. To be sure that a profit has been correctly calculated, it is important to have a crisp cutoff at the beginning and end of the year.

Sometimes it’s all about the bookkeeper being sure all items are included. Software programs can help but, whether hand posted or computerized, an accurate set of books with all transactions included and reconciled is essential. If all the year’s transactions are not included and all the balances are not reconciled, the result won’t be an accurate profit calculation.

If there’s no cash in the bank at the end of the year, maybe it’s just that you spent all of the company’s profit.

If you need our help showing you where the cash that represents profit is or went, please let us know and we can point you in the right direction!

Author:

Shareholder
Dennis supervises the daily activities in the firm’s litigation support and business valuation practice areas. In addition to providing general accounting and tax services to the firm’s clients, his areas of specialization include construction and real estate development accounting services, as well as individual tax preparation and retirement planning advice.
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JB Financial Associates is now Alloy Silverstein.
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