You’re looking from the Profit and Loss Statement to your bank balance, back to the Profit and Loss Statement, and wondering where your money went. The business has made a profit but your bank account doesn’t seem to reflect this. And even worse, you’re still expected to pay tax!
Profit is never the same as what you’ll see in your bank account. Although the business receives income (sales) and pays business expenses, other transactions influence the bank balance. Consider the following when trying to “locate” your missing money.
Personal transactions (these are not business-related and do not impact profit)
- Transferring regular amounts to your personal account to cover living expenses.
- Taking one-off large amounts for personal items – for example, a vehicle or property deposit.
- You may have paid personal tax to the IRD from the company’s bank account.
- Personal money you deposit into the business’ bank account isn’t income, but it increases your bank balance.
- You’ve made a lot of sales which show as income in the Profit and Loss account, but if your debtors haven’t paid you, the money isn’t there.
- Perhaps you purchased a lot of supplies just before the tax year end. These will appear as expenses in the Profit and Loss account, but your bank account won’t reflect this until the suppliers are paid.
- The purchase of a business asset may reduce your bank balance but the full amount cannot be claimed as a business expense. These assets are depreciated (written off) over a number of years.
- GST and income tax payments for the business have no impact on profit, but they will reduce your bank balance.
The Cash Summary Report will show only cash transactions – those which go through your bank account. It’s not perfect and may incorrectly show non-expense items (drawings, asset purchases, etc) as deductible expenses.
A Profit and Loss Account prepared on a cash basis (see number 6 in the link) is also useful.
If you use Xero for your debtors and creditors, the Short Term Cashflow will estimate your bank balance based on when your bills are due, and when you expect debtors to pay.
Xero’s Business snapshot shows interesting information, but cannot yet be customised.
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