This question is asked a lot, because let’s be honest… it can be down right confusing! We get it! When you think of your net income, you think of the money that is sitting in your bank account. Don’t worry, you’re not alone! Our mind tells us this makes sense, but there are a few reasons why this is not the case.
Your Income Statement, better known as your Profit and Loss Statement includes many items that your bank account may not yet show. The basic equation on your P&L is revenue – cost of goods sold (COGS) – expenses = net income.
Let’s take a closer look at this. Just as an example, we will say that you carry a nutritional supplement that your clients can purchase. You keep an inventory of this supplement on hand (inventory). You purchased it in January 2017 and didn’t sell it until March 2017. Your P&L would show the cash going out on the purchase in January, but in March your P&L would show the sale of the product ($50) and the cost of the good sold ($25). This would show a $25 profit on your income statement, but you would have $50 entering your bank account.
The previous COGS example is one reason why the bank accoung won’t match your net income or (gasp!) loss. But, what if you don’t carry any type of inventory and it still isn’t matching up?
Let’s look at your general business insurance. Most companies pay their premium up front for 6 months – 1 year. If this is the case, then your bank is going to show the large sum ($1200) leaving your account the month you pay the premium. Your books, on the other hand, will show $100 expense for insurance monthly, but you will not see that $100 leaving your bank account because you already made the payment in a previous month.
As you can see, your revenue and expenses may not always be in the same month that it shows on your bank statement. Leading to a mismatched P&L and bank statement. Do not fret! Your bookkeeper should be able to go over this with you if you have questions in the future and would like a further understanding.
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