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).