Why Your Bank Balance Is Not Your Profit: A Simple Guide for Promoters
"We made ₹10 lakh this month!" Then the accountant sends the profit and loss account (P&L), and it shows a loss. Or the opposite happens: the bank account is nearly empty after buying a new vehicle, yet the P&L says the business made a profit.
If you run a business without an accounting background, this bank balance vs profit puzzle is one of the most confusing parts of the job. This guide explains, in plain language and with simple examples, every common reason why your bank balance and your profit tell different stories, and what that means for running your business.
📑 Contents
- Quick Read
- Simple Explanation — Evening Chai Conversations
- Detailed Guide
- The one-line rule
- The four boxes at a glance
- Box A: Money came in, but it is not income
- Box B: Money went out, but it is not an expense
- Box C: Income earned, but money not yet received
- Box D: Expense counted, but money not yet paid
- Story 1 — July: "Best month ever!"
- Story 2 — September: "This month finished us!"
- Where did September's money go?
- Your real free cash
- Danger zone: money that is not yours
- Your monthly checklist
- Frequently Asked Questions
⚡ Quick Read
☕ Simple Explanation — Evening Chai Conversations
A Saturday evening in early October. Tea on the lawn. Vijay runs a wholesale trading company, Vijay Traders Pvt Ltd. He has been staring at his phone for ten minutes, and his tea has gone cold.
Vijay: Hadhya, look at this. Meera has sent September's accounts. She says we made a profit of ₹1,42,500. Profit! My bank balance has fallen by almost ₹24 lakh this month. I think this month has finished us.
Hadhya: Appa, before we talk about September, do you remember July?
Vijay: How can I forget? Best month ever. The bank balance went up by more than ₹11 lakh. I told everyone at the association meeting.
Hadhya: And what did Meera's P&L say for July?
Vijay: (a little quieter) A loss of ₹1 lakh. I thought she had made some mistake. Now this. Either she is wrong twice, or I am.
Hadhya: Nobody is wrong, Appa. The bank and the P&L are answering two different questions. Your bank asks only one thing: did money move? The P&L asks something else: did we earn it, or use it up, this month? Most months, those two answers are different. Read more →
Vijay: Money is money. If it comes into my account, I have earned it.
Hadhya: Okay. Suppose your friend Thaman lends you ₹50,000 tomorrow. Your bank balance goes up by ₹50,000. Did you earn ₹50,000?
Vijay: No. I have to give it back to him.
Hadhya: And when I bought my ₹60,000 phone, which I'll use for three years, did I lose ₹60,000 that month?
Vijay: (smiling) No, you still have the phone. Fine. Show me with July.
Hadhya: In July, ₹4 lakh came from customers who had bought in June. That sale was already counted as June's income. If we count it again in July, we count the same sale twice. ₹3 lakh was an advance for an August order. Until we deliver, it is still the customer's money; if we don't deliver, we have to return it. ₹2 lakh was your own money that you lent to the company, and the company has to pay it back to you. And ₹1,08,000 was GST.
Vijay: GST is also our collection only, no?
Hadhya: We collect it, but it isn't ours. Think of a postman. The parcel passes through his hands, but it isn't his. And remember, GST is due on what we bill, not on what we collect. On July's ₹10 lakh of sales, ₹1,80,000 of GST had to go to the Government by 20 August, even though most customers had not paid yet. Read more →
Vijay: So out of that ₹11 lakh…
Hadhya: ₹8.60 lakh already belonged to someone else: the Government, the staff, the electricity board, the customer, and you. And the loss was real. The goods we sold in July were bought and paid for in June, but their cost belongs to July, because that is when we sold them. The staff worked in July even though we paid them on 7 August. The van and computers wore out a little. And that customer who shut his shop? His ₹50,000 is never coming. Read more →
Vijay: All right. But September — ₹24 lakh is gone. That is real.
Hadhya: Is it gone, Appa? You bought the new van for ₹12 lakh. Is the van gone?
Vijay: It's standing outside the godown.
Hadhya: Then you didn't lose ₹12 lakh. You changed cash into a van that will work for you for about eight years. Only its wear and tear for the month, about ₹12,500, is September's cost. You bought ₹20 lakh of festival stock, and ₹4 lakh of it is still in the godown, still worth money. Customers still owe us ₹6 lakh. You paid ₹2 lakh as deposit for the new godown, and that comes back when we vacate. The insurance was paid for the whole year in one go. And in the EMI, only the interest is a cost. The rest is just returning the bank's money. Read more →
Vijay: So the money didn't vanish.
Hadhya: It changed form. It is now a van, stock, a deposit and customers' dues. That is why the bank is low and the P&L still shows a profit.
Vijay: There are too many cases. How do I remember all this?
Hadhya: Just four boxes. (counting on her fingers) One: money came in, but it isn't income — loans, advances, old dues, GST, the owners' capital. Two: money went out, but it isn't an expense — the van, stock, deposits, the loan principal, tax. Three: income earned, but the money hasn't come yet — credit sales. Four: expense counted, but the money hasn't gone yet, or never goes — unpaid salaries and bills, wear and tear, bad debts. Every confusing month fits into these four boxes. Read more →
Vijay: Then which one should I believe — the bank or Meera?
Hadhya: Both, Appa, for different things. The P&L tells you whether the business is really earning. The bank tells you whether you can pay salaries next week. A business can show a profit and still run out of cash, and it can have a full bank account while losing money. You have to watch both. Read more →
Vijay: And income tax? At least tax will be less this month, no? The bank is empty.
Hadhya: (laughing) Tax doesn't look at the bank, Appa. It looks at profit. September's profit counts for advance tax even though the bank is low. And the GST, TDS and PF money we are holding — if we spend it and pay late, interest starts running. Read more →
Vijay: So what should I ask Meera for every month?
Hadhya: Three things. The P&L: are we earning? The balance sheet: what do we own and what do we owe? And a one-page statement showing why the bank moved differently from the profit. Plus one number: how much of the bank balance is truly free after GST, TDS, salaries, bills and advances. Read more →
Vijay: (pouring a fresh cup) So the bank tells me where the money is, and the P&L tells me whether I am really earning.
Hadhya: Exactly, Appa. Now drink your tea. This one is still hot.
📘 Detailed Guide
In this guide
- The one-line rule
- The four boxes at a glance
- Box A: Money came in, but it is not income
- Box B: Money went out, but it is not an expense
- Box C: Income earned, but money not yet received
- Box D: Expense counted, but money not yet paid
- Story 1 — July: "Best month ever!"
- Story 2 — September: "This month finished us!"
- Where did September's money go?
- Your real free cash
- Danger zone: money that is not yours
- Your monthly checklist
1. The one-line rule
Income is what you earned by selling or working this month. Expense is what you used up this month to earn it. Profit is the difference.
Everything else is just money moving around. It is borrowed, returned, parked somewhere, converted into something else, or held for someone else. That kind of movement changes your bank balance, but it does not change your profit.
The bank statement records money on the day it moves. The P&L records income in the month you earn it and expenses in the month you use them up. That single difference explains every case in this guide.
Two simple examples:
- A friend lends you ₹50,000. Your bank balance goes up by ₹50,000, but you have not earned anything. You have to give it back.
- You buy a ₹60,000 phone that you will use for three years. Your bank balance drops by ₹60,000, but you have not "lost" ₹60,000 this month. You still have the phone. Its real cost is about ₹20,000 a year.
2. The four boxes at a glance
Every reason why the bank and the P&L disagree falls into one of four boxes.
| Box | What happened | What it does | Common examples |
|---|---|---|---|
| A | Money came in, but it is not income | Bank looks better than the business | Old dues, customer advances, loans, owners' capital, GST collected, deposits, refunds |
| B | Money went out, but it is not an expense | Bank looks worse than the business | Vehicle or machine, stock in the godown, deposits, yearly payments in advance, EMI principal, GST, income tax |
| C | Income earned, but money not yet received | P&L looks better than the bank | Credit sales, work done but not billed, TDS deducted by customers |
| D | Expense counted, but money not yet paid, or never paid | P&L looks worse than the bank | Unpaid salaries and bills, wear and tear, bad debts, damaged stock |
3. Box A: Money came in, but it is NOT income
These make you feel richer than you are.
A1. Old dues collected from customers
Example: In July, customers paid ₹4,00,000 for goods they had bought in June.
Why it is not income: That sale was already counted as income in June, when the goods were sold. In July you are only collecting the money. Counting it again would count the same sale twice.
A2. Advance received from a customer
Example: A customer pays ₹3,00,000 now for goods you will deliver next month.
Why it is not income: You haven't delivered anything yet. If you fail to deliver, you must return the money, so it is still the customer's money. It becomes income only in the month you deliver.
A3. Loans — from a bank, an overdraft or cash credit account, or the promoter
Example: The bank releases a ₹10,00,000 loan, or the promoter lends ₹2,00,000 to the company.
Why it is not income: Borrowed money must be paid back, usually with interest. If a friend lends you ₹10,000, your wallet is fuller, but you are not richer.
A4. Share capital — money the owners put in as their investment
Example: Two promoters bring in ₹5,00,000 each as share capital.
Why it is not income: This is the owners' own money moving from their pocket into the company's pocket. Moving money from your right pocket to your left pocket doesn't make you richer. Share capital is not a loan — the company does not have to repay it on a fixed date — but it is not earned either. Income is money earned from customers. This is money invested by the owners, who are rewarded later through the company's profits.
A5. GST collected from customers
Example: You sell goods for ₹1,00,000 and collect ₹1,18,000, including ₹18,000 GST.
Why it is not income: You collect GST on behalf of the Government. Like a postman carrying a parcel, it passes through your hands, but it isn't yours. You must pay it to the Government by the due date every month or quarter. Your income is ₹1,00,000, not ₹1,18,000.
A6. Selling an old asset
Example: Your old van is worth ₹2,00,000 in the books (its price minus the wear and tear counted so far). You sell it for ₹2,50,000.
Why it is not (all) income: You are only turning an old thing back into cash. The bank goes up by ₹2,50,000, but the profit is only the extra ₹50,000 you received above its value in the books.
A7. Security deposits received
Example: A dealer gives you a ₹1,00,000 deposit when you appoint him.
Why it is not income: You must return it when the arrangement ends. You are only holding it for him.
A8. Refunds received
Example: An income-tax refund, a GST refund, or a rent deposit returned when you vacate.
Why it is not income: This is your own money coming back. You paid it out earlier; you did not earn it now. Only the interest paid on a refund, if any, is income.
4. Box B: Money went out, but it is NOT an expense
These make you feel poorer than you are.
B1. Buying a vehicle, machine, computer, furniture or building
Example: The company buys a delivery van for ₹12,00,000.
Why it is not this month's expense: You haven't lost the money. You have changed cash into something that will work for you for many years. The P&L counts only the part that gets used up each year, called wear and tear (accountants call it depreciation). If the van lasts about 8 years, its cost is roughly ₹1,50,000 a year, or ₹12,500 a month. A ₹60,000 phone used for three years costs about ₹20,000 a year — not ₹60,000 in the month you bought it.
B2. Loan EMI — the principal part
Example: An EMI of ₹60,000 is made up of ₹45,000 principal and ₹15,000 interest.
Why it is not an expense: When you received the loan, it was not income. So when you return it, it is not an expense. Only the interest — ₹15,000 here — is the real cost of borrowing.
B3. Stock bought but still lying in the godown
Example: You buy goods worth ₹20,00,000. Goods costing ₹16,00,000 are sold this month.
Why it is not this month's expense: The ₹4,00,000 still in the godown is still worth money, just in a different form. Its cost goes to the P&L only when it is sold, or when it gets damaged or expires. This is how the cost of goods sold is worked out:
For example: ₹3,00,000 + ₹10,00,000 − ₹4,00,000 = ₹9,00,000. Only ₹9,00,000 is this month's cost, even though you paid for ₹10,00,000 of goods.
B4. Advance paid to a supplier
Example: You pay a supplier ₹1,00,000 for goods that will arrive next month.
Why it is not an expense: You haven't received anything yet. The supplier still owes you either the goods or your money back.
B5. Yearly payments made in one go
Example: Insurance of ₹1,20,000 for the whole year, an annual maintenance contract, a yearly software subscription, or rent paid in advance.
Why it is not all this month's expense: You paid for 12 months of benefit in one month, so each month carries only its share — ₹10,000 a month in this case. Paying a child's full-year school fees in June doesn't make June your most expensive month. The cost belongs to the whole year.
B6. Security deposits paid
Example: A rent deposit for a godown, an electricity deposit, or a deposit given with a tender.
Why it is not an expense: It comes back to you when you vacate or when the work is over. It is your money parked with someone else.
B7. GST paid on purchases
Example: You buy goods for ₹1,00,000 and pay ₹1,18,000, including ₹18,000 GST.
Why it is not an expense: The Government gives this ₹18,000 back to you by reducing the GST you pay on your sales. So it is not a cost. For a few items the law does not allow this — for example, most passenger cars. In those cases the GST becomes part of the cost.
B8. GST paid to the Government every month or quarter
Example: Paying July's GST of ₹1,80,000 on 20 August.
Why it is not an expense: You are handing over money that was never yours — the GST you collected from your customers (item A5).
B9. Paying TDS, PF and ESI that you deducted from others
Example: You pay a contractor ₹99,000 on a ₹1,00,000 bill after deducting ₹1,000 as TDS, and deposit that ₹1,000 with the Government the next month.
Why it is not an extra expense: The full ₹1,00,000 bill was already counted as an expense. Depositing the ₹1,000 is only paying part of that bill to the Government on the contractor's behalf. The same applies to the employees' share of PF and ESI cut from their salaries.
B10. Income tax and advance tax
Example: Advance tax paid on 15 September.
Why it is not a business expense: First the profit is worked out; then tax is taken out of that profit. Tax is a share of the profit paid to the Government, not a cost of running the business. That is why it is shown after the business profit, not among the business costs.
B11. Dividend paid to shareholders
Why it is not an expense: A dividend is the company sharing its profit with its owners. It is a reward from profit, not a cost of earning it.
B12. Loans given to promoters, relatives or group companies
Why it is not an expense: The money is still owed back to the company. But be careful: company law strictly restricts companies from lending to their directors and related persons, so speak to your CA before doing this. (If a promoter is paid a salary for working in the company, that salary is an expense.)
B13. Clearing old bills
Example: Paying August salaries in September, or paying a supplier's bill from last month.
Why it is not this month's expense: The expense was counted when the work was done or the goods were received. Now you are only clearing the dues. Counting them again would be double counting.
5. Box C: Income earned, but money NOT yet received
These make the P&L look better than the bank.
C1. Credit sales
Example: You sell goods for ₹20,00,000 in September. Customers pay ₹14,00,000 and still owe ₹6,00,000.
Why it is still income: You earned the income the moment you delivered the goods and raised the bill. Collecting the money later does not change when you earned it.
C2. Work done but not yet billed, or interest earned but not yet credited
Example: A job finished on 28 September but billed on 3 October. Or interest on a fixed deposit that the bank will credit only at maturity.
Why it is still income: You already earned it by doing the work, or by keeping money in the FD for those months. Only the bill or the bank credit is pending.
C3. TDS deducted by your customers
Example: A customer owes you ₹1,00,000. He pays you ₹98,000 and deposits ₹2,000 with the Government in your name as TDS.
Why the full amount is income: Your income is the full ₹1,00,000. The ₹2,000 is your tax already paid, and you get credit for it when you file your income-tax return. Your cash is lower, but your income is full.
6. Box D: Expense counted, but money NOT yet paid (or never paid)
These make the P&L look worse than the bank.
D1. Goods bought on credit and already sold
Example: Goods costing ₹3,00,000 are bought on 30 days' credit and sold this month.
Why it is this month's expense: You sold the goods this month, so their cost belongs to this month, even though the supplier will be paid next month.
D2. Salary, rent, electricity, professional fees or interest still unpaid
Example: September salaries of ₹1,50,000 paid on 7 October.
Why it is this month's expense: Your staff worked in September, and you used the shop and the power in September. The cost belongs to September, whenever you actually pay.
D3. Wear and tear on assets (depreciation)
Example: About ₹12,500 a month on the ₹12,00,000 van.
Why it is an expense with no cash: The van wears out a little every month, even though no money goes out now. The money left on the day you bought it (item B1). This is that month's share of the cost.
D4. Bad debts — a customer who will never pay
Example: A customer who owed you ₹50,000 closes his shop and cannot be traced.
Why it is an expense with no cash: The sale was counted as income earlier. Now that the money will never come, that loss must be recorded. No cash moves; the money you expected simply never arrives.
D5. Damaged, expired, stolen or outdated stock
Example: Goods worth ₹40,000 are damaged by a leak in the godown during the monsoon.
Why it is an expense with no cash: You paid for these goods earlier, but they can no longer be sold, so their value is lost this month.
D6. Gratuity, leave encashment and annual bonus set aside
Example: Setting aside a share of the year's Diwali bonus every month.
Why it is this month's expense: Staff earn these a little every month, even though you pay them later, sometimes years later. A fair monthly profit sets aside each month's share now.
D7. Loss on selling an old asset
Example: Your old van is worth ₹2,00,000 in the books and you sell it for ₹1,50,000.
Why there is a loss even though money came in: The bank goes up by ₹1,50,000, yet the P&L shows a ₹50,000 loss, because ₹50,000 of value is gone.
7. Story 1 — July: "Best month ever!"
Vijay's company trades in goods at a margin of about 20%. In July, his bank balance went up by ₹11,58,000, and he told everyone it was his best month. Then the accountant's P&L showed a loss of ₹1,00,000. Here is what actually happened. (Sales figures are before GST.)
| What happened in July | Bank (₹) | P&L (₹) | Which box |
|---|---|---|---|
| Sold goods for ₹10,00,000; customers paid only ₹2,00,000 so far | +2,00,000 | +10,00,000 | C (₹8 lakh still to come) |
| The goods sold had been bought and paid for in June | 0 | −8,00,000 | Paid in June, cost counted now |
| June's pending dues collected | +4,00,000 | 0 | A1 |
| Advance from a customer for an August order | +3,00,000 | 0 | A2 |
| Vijay's own loan to the company | +2,00,000 | 0 | A3 |
| GST collected along with customer payments (18% on ₹6,00,000 received) | +1,08,000 | 0 | A5 |
| Shop rent paid | −50,000 | −50,000 | Same on both sides |
| July salaries, to be paid on 7 August | 0 | −1,50,000 | D2 |
| Electricity bill received, not yet paid | 0 | −30,000 | D2 |
| Wear and tear on the old van and computers | 0 | −20,000 | D3 |
| A customer shut down; his ₹50,000 will never come | 0 | −50,000 | D4 |
| Result for July | +11,58,000 | −1,00,000 |
The loss is real. Sales of ₹10,00,000 earned a margin of ₹2,00,000, but the month's other costs came to ₹3,00,000. The bank looked healthy only because money that belonged to other months, and to other people, arrived in July.
How much of July's ₹11,58,000 was really free?
| Item | ₹ |
|---|---|
| Bank balance went up by | 11,58,000 |
| Less: GST on July's ₹10,00,000 of sales, due to the Government by 20 August (payable on the bill, even though customers have not paid in full) | −1,80,000 |
| Less: July salaries due on 7 August | −1,50,000 |
| Less: electricity bill due | −30,000 |
| Less: customer's advance (goods still to be delivered) | −3,00,000 |
| Less: Vijay's own loan, to be repaid to him | −2,00,000 |
| Really free | 2,98,000 |
And most of that ₹2,98,000 is simply June's sales money arriving late, not anything earned in July.
8. Story 2 — September: "This month finished us!"
In September, Vijay prepared for the festival season. His bank balance fell by ₹23,70,000, and he was sure the business was in trouble. The P&L showed a profit of ₹1,42,500. To keep the numbers clean, GST is left out of this story.
| What happened in September | Bank (₹) | P&L (₹) | Which box |
|---|---|---|---|
| Festival sales of ₹20,00,000; customers paid ₹14,00,000 | +14,00,000 | +20,00,000 | C1 (₹6 lakh still to come) |
| Bought stock for ₹20,00,000, paid in full; goods costing ₹16,00,000 sold, ₹4,00,000 still in the godown | −20,00,000 | −16,00,000 | B3 (for the ₹4 lakh) |
| New delivery van | −12,00,000 | 0 | B1 |
| Wear and tear: new van (about ₹12,500) plus old van and computers (₹20,000) | 0 | −32,500 | D3 |
| Insurance premium for the whole year | −1,20,000 | −10,000 | B5 |
| EMI on the business loan (₹45,000 principal + ₹15,000 interest) | −60,000 | −15,000 | B2 |
| Rent deposit for a new godown | −2,00,000 | 0 | B6 |
| August salaries paid | −1,40,000 | 0 | B13 |
| September salaries, to be paid on 7 October | 0 | −1,50,000 | D2 |
| Shop rent paid | −50,000 | −50,000 | Same on both sides |
| Result for September | −23,70,000 | +1,42,500 |
The profit is real. Sales of ₹20,00,000 earned a margin of ₹4,00,000, and the month's other costs came to ₹2,57,500. The bank looked terrible only because most of the money went into things that will serve the business for months or years.
9. Where did September's money go?
The money did not vanish. It changed form.
| Where the money is now | ₹ |
|---|---|
| The new van (it will work for about 8 years) | 12,00,000 |
| With customers (they still have to pay) | 6,00,000 |
| Stock in the godown | 4,00,000 |
| Deposit with the godown owner (comes back on vacating) | 2,00,000 |
| Insurance cover already paid for the next 11 months | 1,10,000 |
| Loan reduced | 45,000 |
| Total money parked in these places | 25,55,000 |
| Less: cash produced by the month's profit (₹1,42,500 profit + ₹32,500 wear and tear, which used no cash) | −1,75,000 |
| Less: September's salary cost is ₹10,000 more than the August salaries paid, and that ₹10,000 has not yet left the bank | −10,000 |
| Fall in bank balance | 23,70,000 |
Every rupee is accounted for. The van, the stock, the deposit and the customers' dues are all still the company's. They are simply not in the bank today.
10. Your real free cash
The P&L tells you whether the business is earning. The bank tells you whether you can pay next week. A business can show a profit and still run out of cash, and it can have a full bank account while losing money. So watch both, and before you spend, work out this one number:
In July, Vijay's bank went up by ₹11,58,000, but his real free cash from that month was only ₹2,98,000. Planning on the bigger number is how good businesses end up short of money for GST, salaries and suppliers.
11. Danger zone: money that is not yours
Some of the money sitting in your bank belongs to someone else. Treating it as your own is the most expensive mistake in this guide.
GST collected from customers. It belongs to the Government and must be paid by the due date. GST is due on what you bill, not on what you collect, so on a credit sale you pay the GST before the customer pays you. If you pay late, interest at 18% a year runs on the late amount, and a late fee applies for filing the return late. If returns are not filed for a long period, the GST registration itself can be cancelled, and your customers lose their GST credit, which hurts your business with them.
TDS deducted from others' bills or salaries. It is their tax, held by you for a few days. If you deposit it late, interest at 1.5% a month applies, and even part of a month counts as a full month. Fees and penalties apply for late or wrong TDS returns, and deducting TDS but not depositing it is treated very seriously; it can even lead to prosecution. If you are already facing a TDS demand, read I Paid the TDS Default — Why Is TRACES Still Showing the Demand?
PF and ESI cut from employees' salaries. This is your employees' money. Late deposit attracts interest and penalty charges (called damages), and not depositing it can lead to criminal action.
Customer advances. You still owe the goods. If you spend the advance on something else, you will need fresh money to buy the goods you have promised.
Income tax follows profit, not the bank balance. Companies pay advance tax in four instalments — 15 June, 15 September, 15 December and 15 March — based on the profit expected for the year. A month like Vijay's September, with a low bank balance and a healthy profit, still adds to the tax due. If advance tax is paid short or late, interest at 1% a month applies.
Company money taken out by promoters. The company's money is not the promoter's personal money, even in a family company. Taking it out as a "loan" is strictly restricted by company law. Speak to your CA before doing it.
12. Your monthly checklist
Three reports to ask your accountant for, every month:
- The P&L — Are we earning?
- The balance sheet — What do we own, and what do we owe?
- A one-page profit-to-bank statement — Why did the bank move differently from the profit? Small companies are not required by law to prepare a cash flow statement, so most promoters never see one. Ask for it anyway; it is the single most useful page for a business owner.
Five questions to ask along with the reports:
- How much do customers owe us, and how old are those dues?
- How much do we owe suppliers, staff and the Government?
- How much stock is in the godown, and is any of it slow-moving or damaged?
- How much of our bank balance is GST, TDS, PF, ESI or customer advances?
- What big payments are due next month — GST, salaries, EMIs, tax instalments?
Once these answers come in every month, the "bank says one thing, P&L says another" confusion disappears.
Frequently Asked Questions
Why does my P&L show a loss when my bank balance went up?
Because much of the money that came in was not this month's income. Old dues from earlier sales, customer advances, loans, the owners' capital and GST collected all increase the bank balance without being income. At the same time, costs such as unpaid salaries, wear and tear on assets and bad debts reduce profit without any money leaving the bank.
Why does my P&L show a profit when my bank balance went down?
Because much of the money that went out was not this month's expense. Buying a vehicle or machine, stock still in the godown, deposits, yearly payments made in advance and the principal part of loan EMIs all reduce the bank balance, but the money has only changed form. Sales made on credit also count as income before the money arrives.
Is the money promoters put in as share capital the company's income?
No. Share capital is the owners' own money moved into the company. It is not a loan, because the company does not have to repay it on a fixed date, but it is not earned from customers either. The owners are rewarded later through the company's profits.
Is buying a vehicle or machine an expense?
Not in the month you buy it. The vehicle or machine will work for the business for many years, so only its wear and tear for each year, called depreciation, is counted as an expense. A ₹12 lakh van used for about 8 years costs roughly ₹1.5 lakh a year.
Is the GST I collect from customers my income?
No. You collect GST on behalf of the Government and must pay it by the due date. If you spend it and pay late, interest at 18% a year applies on the late amount, along with late fees for late returns.
Can a profitable business run out of cash?
Yes. If profits are tied up in customer dues, stock, new assets and deposits, the business can show a profit and still not have money to pay salaries, suppliers or GST. That is why you should track your real free cash every month, not just the profit.
Do I pay income tax on my bank balance or on my profit?
On your profit. A low bank balance does not reduce your tax if the business has made a profit. Advance tax is paid in instalments on the profit expected for the year, and short or late payment attracts interest at 1% a month.
Which reports should I ask my accountant for every month?
Three: the P&L, which shows whether you are earning; the balance sheet, which shows what you own and owe; and a one-page profit-to-bank statement, which explains why the bank moved differently from the profit.
This article is for general information and simple understanding. The examples are illustrative and simplified: GST is left out of some examples, and wear and tear ignores scrap value. It is not a substitute for advice on your specific business. Please speak to your Chartered Accountant before acting on it.
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