AccountingRevision - Master A-Level Accounting with AI

Cash vs Profit

Profit = revenue − expenses (accruals basis — recognised when earned/incurred, not when cash moves)

Cash flow = cash inflows − cash outflows (when money actually enters or leaves the bank)

A business can be profitable but cash-poor, or cash-rich but loss-making.

Situation	Effect on profit	Effect on cash
Credit sale made	Increases profit immediately	No cash yet (received later)
Cash collected from receivable	No effect on profit	Increases cash
Depreciation charged	Reduces profit	No effect on cash
Non-current asset purchased	No immediate profit effect	Reduces cash
Loan received	No profit effect	Increases cash
Inventory purchased on credit	No immediate profit effect	No cash effect yet
Inventory paid for	No profit effect	Reduces cash

A business can make a profit but run out of cash — e.g. rapid credit sales growth where customers take time to pay; heavy capital expenditure funded from overdraft
A business can make a loss but have positive cash — e.g. received a large loan; run down inventory and collected receivables; cut capital expenditure

Short-term survival requires cash; long-term survival requires profit.