Question
Profit or Loss Account (Income Statement) of a business shows a net profit of 500,000. The owner of the business says, Where is the money?
Profit or Loss Account (Income Statement) of a business shows a net profit of 500,000. The owner of the business says, Where is the money? My business does not have an increase in cash by $500,000 in the bank account. Where is the $500,000 profit?
Required:
Provide an explanation to the owner of the business about why net profit of a Profit or Loss Account (Income Statement) is not necessarily equal to the cash inflow. Your explanation must include two examples of accounting entries that lead to a difference between net profit of the Income Statement and cash flow of the business.
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