How to calculate cash profit
/What is Cash Profit?
Cash profit is the profit recorded by a business that uses the cash basis of accounting. Under this method, revenues are based on cash receipts and expenses are based on cash payments. Consequently, cash profit is the net change in cash from these receipts and payments during a reporting period.
Cash profit does not include other types of cash receipts and payments than those involved with the sale of goods or services. Thus, a cash receipt from the sale of a fixed asset or of company shares or bonds is not considered a cash receipt to be included in the calculation of cash profit.
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Cash Profit vs. Cash Flows
The cash profit concept closely relates to the net change in cash flows that an organization experiences during a reporting period. The difference between the change in total cash flows and the cash profit is that the cash profit only relates (as just noted) to the sale of goods or services.
Cash Profit vs. Accrual-Basis Profit
A company using the accrual basis of accounting will likely not record the same amount of profit as would be derived from the cash profit calculation. This is because the accrual basis records revenue based on goods or services provided, and records expenses based on consumption, irrespective of any changes in cash flow. Thus, the timing of revenue recognition is accelerated under the accrual basis of accounting if goods or services are sold on credit, while a cash basis organization will wait to recognize the revenue until customers have paid in cash. The timing of expense recognition is accelerated under the accrual basis if suppliers issue goods or services to the buyer on credit, so that cash payments are delayed.
In short, the differences between the accrual basis and cash basis of accounting make it quite likely that the net profit figure will be different from the cash profit figure reported by an entity.