Profit bigger than actual cash balance

#1

Hi,
I have been using Manager for 6 months for my simple kindergarten business. The Manager has been very easy and for lay person like me without any knowledge of accounting.

Of late I started to use the reports for tax purposes. Upon doing that, I discovered the number of profit is bigger than my actual bank/cash balance. I audited through all my records, they are all correct. I wondered what went wrong. Can anyone enlighten me about the reports, profits and loss and what should I report to the revenue department by using Manager?

Thanks

#2

This can occur for any number of reasons - are you using cash or accrual basis ?

Examples would be:

  1. If you issued a sales invoice last week but don’t get paid until next week then the profit will be higher until the cash is received.

  2. If you purchased an asset, this would reduce your cash balance but not effect your profit.

#3

Thanks for the quick reply.

Yes, I have discovered the number in the accrual basis is bigger that cash. This reason, I have been using the cash.

On your examples, is that also means that when I make a capital drawings for my salary, it will not reduce my profit, am I right? If that is the case, should I pay myself a salary rather than a drawing?

Likewise to the asset, if I purchase a computer, rather than asset, I should put it as computer expenses?

Sorry, I am very confused about the accounting. Tried to learn, but never understand them. Bottom line, how should I report to the revenue department?

Thanks again for your help.

#4

This is not a good reason to make such a choice. Many other considerations are involved.[quote=“amazinggrace, post:3, topic:8988”]
when I make a capital drawings for my salary, it will not reduce my profit, am I right? If that is the case, should I pay myself a salary rather than a drawing?
[/quote]

If you are a sole proprietor, you will pay tax on your profit, regardless of whether you take the money out as a drawing. In most jurisdictions, if you are a proprietor, you cannot actually pay yourself a salary, because you cannot be an employee of a company that is an extension of yourself. All money removed from the company must be considered a capital drawing.

This is a question that must be answered according to local law, which sets thresholds for capitalization. Making the wrong selection can be illegal.

It sounds like you need a session with a local accountant to answer questions according to local law. No-one on this forum can answer that question for you.

#5

I guess the question is - is it that important to have both (profit / cash) the same - I will say not for this reason.
This is only your first year and that’s the only time that they will align - e.g. lets say that at the year end your profit and cash both match - 3000. In the next year your profit starts again from zero but your cash doesn’t.

I am assuming that you are a sole proprietor (not a company) so taking the “salary” as a drawing is probably best as then your P&L profit figure will be more reflective of your actual income for tax purposes.

However, if you would prefer from a management report perspective to show it as an expense, then you could design the chart of accounts to reflect both “taxable income” and taken salary to see the relationship.

With regards to the computer, you will need to understand the local ruling with regards to writing off and capitalisation.

What are you trying to report - taxes on transactions (gst/vat) or taxes on income.

#6

Thanks again for the input.

So in other word, the profit and lower cash is not that actually important, the important ones are how I enter the data like the asset and the capital drawings, am i right?

My school is registered as non-profit and not taxable on the gst. But what I know that as a non-profit, profit must be 0 by the 4th year. When I look at the number in the profit and the cash balance, I am very confuse how to get it 0 by the 4th year.

Back to the accrual basis and cash, can you please enlighten me about them? I just read in the website, that the “accrual method accounts for revenue when it is earned and expenses goods and services when they are incurred. The revenue is recorded even if cash has not been recieved or if expenses have been incurred but no cash has been paid. Accrual accounting is the most common method used by businesses.” Why is this the common method? Why do businesses would like to see money that is not being paid rather than the actual money received?

In my case, we use the invoice as billing to students. I believe the accrual basis will reflect all the invoices. What if I do not receive payment or students have upstanding invoices, how do you reconcile them using the accrual basis?

#7

@amazinggrace, your questions confirm you earlier comment that you know little about accounting. This forum is for questions about how to use Manager to accomplish the purposes and goals of accounting. So until you understand what double-entry accounting is and what it provides to you, you will still be confused by Manager (or any other accounting software). This is like picking up a tool and trying to use it without knowing what it is supposed to do.

I recommend spending some time educating yourself about accounting in general. Start here: https://www.accountingcoach.com/. Then a conversation with an accountant will be useful. Yes, you will probably spend some money, but you will save more in the long run and possibly stay out of legal trouble.

#8

Yes

This is a local authority question as is peculiar to your location, which is where ?

Because it’s a more accurate barometer of your business’s wellbeing.

They aren’t seeing money, they are seeing profitability - not all income & expenses are related to money.

Reconciling unpaid invoices is not related to either cash or accrual basis, it related to your Accounts Receivable balance and this account is only shown on the Summary tab when accrual basis is used.

#9

Whilst I agree with all of the above comments and observations, personally I find the Cash Summary report that is built-in to Manager quite useful and informative. This of course is no substitute for understanding how accounts and book-keeping actually works, but I feel is useful non-the-less.
Basically, it simply lays out where your cash came from, and where it went.