Why Your P&L Isn’t Telling You About Cash? DEBUNKING A COMMON MYTH! - Part 3

Why Recorded Profit & Loss Net Income Rarely Matches Actual Cash-In!

In the previous two posts, we explored the main reasons why Profit & Loss (P&L) Statements's📈 net income and cash position rarely align, specifically examining how Depreciation and Amortization are included in the P&L, even though they’re not actual cash expenses, while loan principal repayments, which are real cash outflows, are excluded.

Another significant source of discrepancy between P&L net income and cash position at the end of a period is the fact that revenue recorded in the P&L statement does not necessarily match cash💰 inflow in the cash flow statement…

Indeed, in the P&L, sales are typically recognized based on accrual accounting, meaning they’re recorded when earned (i.e., when goods or services are provided), rather than when cash is received.

This follows the revenue recognition principle, which states that revenue should be recorded at the point of delivery or completion of service, assuming it is collectible and the earnings process is substantially complete.

Conversely, when a company receives payment before delivering goods or services—such as with a subscription or a downpayment/deposit—revenue is deferred and only recognized as the goods or services are provided over time. In this case, the P&L statement may not show the income at the end of a given period, while the deposit will still appear in the cash flow statement.

These scenarios help explain why P&L turnover is often disconnected from actual cash recording, adding another reason, along with Depreciation & Amortization and Loan Principal Repayments, why P&L net income doesn’t match cash position at period end.

Makes sense, right? See? No need to be a genius 🧠  to understand finance when it’s explained simply and clearly…

That’s exactly the type of knowledge you'll gain in my Live Masterclass🎓: UNDERSTANDING THE FUNDAMENTALS OF FINANCE & MASTERING THE FUNDRAISING PROCESS... FOR THE REST OF US!

No matter your industry or position, don’t miss the chance to boost your career by easily gaining essential financial knowledge 🚀

Register NOW for the next Masterclass on the dates that match your schedule!