The difference between Cash and Profit
Cash
Definition: The
actual money a business has on hand or in its bank accounts.
Purpose:
Represents the liquidity available to the business for immediate use.
Focus: Measures
cash flow (money coming in and going out).
Key
Document: Recorded in the cash flow statement.
Examples:
Receiving
$5,000 from customers as payment for sales.
Paying
$1,000 in rent or salaries.
A loan of
$10,000 from the bank (increases cash but is not profit).
Profit
Definition: The
surplus remaining after all expenses are deducted from revenue.
Purpose:
Indicates how much the business earned over a period, not how much
money it physically has.
Focus: Measures
profitability (whether the business is making or losing money).
Key
Document: Recorded in the income statement.
Examples:
Revenue
from sales: $10,000
Expenses:
$7,000
Profit =
$10,000 - $7,000 = $3,000 (even if no cash was collected).
Key Differences
Aspect
Cash
Profit
What it shows
Money
available now
Earnings
after expenses
Timing
Immediate or
short-term
Over a
specific period
Document
Cash flow
statement
Income
statement
Loan impact
Adds cash,
but not profit
Not part of
profit
Credit sales
No immediate
cash inflow
Counted as
revenue and affects profit
Example to Illustrate the Difference
Imagine a business:
It sells
goods worth $10,000 on credit (customers promise to pay later).
Profit: $10,000
- $7,000 (expenses) = $3,000 profit.
Cash: $0,
because the money hasn’t been collected yet.
It takes a
loan of $5,000.
Cash: +$5,000
available.
Profit:
Unchanged because loans aren’t revenue.
Analogy
Think of cash as the money in your wallet, available for
immediate spending.
Think of profit as the money you earned after expenses, even if part of
it is still owed to you.
A business can have cash but no profit (e.g., from a loan) or profit
but no cash (e.g., from credit sales).
