Seeing cash in the bank is always a welcome sight and can really offer peace of mind to new businesses especially. However, profits are not always represented in this way, so what happens to them and why don’t you always see what you’re expecting to see?
First, what do we mean by profits?
How are they calculated?
Once again, you’re in charge of ABC Ltd. The business started and you decided to invest £10,000 of your own money to get things up and running. At the end of your first year trading you were left with the following:
- Sales £100,000
- Cost of goods purchased and sold in the year £50,000
- Other costs paid for in the year £15,000
- Stock at end of year valued at cost £2,000
- Drawings for personal use £18,000
- Bank balance £25,000
So, what are your profits here? Profits are made up of sales, less your cost of goods sold and less other costs. In this case that’s £100,000, less £50,000 less £15,000, leaving you total profits of £35,000.
So how do we explain the bank balance?
There is still only £25,000 in the bank but how do we get to that from the figures mentioned above? The simple answer is that, before the end of the year, from this £35,000 you decided to withdraw £18,000 for private use and also purchase £2,000 of further stock that remained unsold at the end of the year. One further thing to take into account is that initial £10,000 you introduced right at the beginning.
With this in mind, let’s take a further look to see how the final figures work out.
From your £35,000 profits we will deduct:
- Personal drawings of £18,000,
- Stock of £2,000,
Now we’ll add back:
- Capital introduced of £10,000.
This all comes to the total of £25,000, which is what you saw in your bank right at the beginning of this post. As such, we can clearly see that in order to reconcile your profits we need to take into account additional receipts and payments that aren’t always initially indicated.
What if my bank account still doesn’t show what I’m expecting?
If you’re expecting to see more in your bank account than actually materialises then the reason will likely be in how your profits have been calculated. There could be payments getting overlooked or receipts lost along the way. A good accountant will be able to help you get to the bottom of things, not only to balance the figures correctly but also to make sure that you understand why the figures had to be balanced in that way. A good accountant will ensure that you understand not only the figures in front of you now but also what to expect going forward.