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December 12, 2008

What is the difference between net cash flow and net income?

Under the accrual method of accounting, net income is calculated as follows: revenues earned minus the expenses incurred in order to earn those revenues. If a company earns revenues in December 2008 but allows those customers to pay in 30 days, the cash from the December revenues will likely be received in January 2009. In this situation the December 2008 revenues will increase the December 2008 net income, but will not increase the company’s December 2008 net cash flow.

Under accrual accounting, expenses are matched to the accounting period when the related revenues occur or when the costs have expired. For example, a retailer may have purchased and paid for merchandise in October 2008. However, the merchandise remained in inventory until it was sold in December 2008. The company’s net cash flow decreases in October when the company pays for the merchandise. However, net income decreases in December when the cost of the goods sold is matched with the December sales.

There are many other examples of expenses occurring in one accounting period but the payments occur in a different accounting period.

In short, the statement of cash flows is a needed financial statement because the income statement does not report cash flows.

Learn more about the Income Statement and the Statement of Cash Flows.

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Comments

17 Responses to “What is the difference between net cash flow and net income?”

  1. Willie on December 14th, 2008 2:43 pm

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  3. Yassir on December 17th, 2008 4:22 am

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  5. lubna on January 3rd, 2009 3:42 am

    hi….i had asked a question about the entries one month back…but i didn’t get the reply

  6. Desmond on January 9th, 2009 10:16 am

    Am a newly employed Accountant i need an up to date correspondence on accounting entries in traveling agency company

  7. Imran on January 21st, 2009 1:25 am

    AOA I am Assistant Finance Manager in Alpha Chemicals Private lLimited, Lahore-Pakistan I want knew about Accural Entries. We have missed one month electricity bill. what is the accural entry of one month lost bill.

  8. mamdouh on January 21st, 2009 6:51 am

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  9. Evelyn on January 25th, 2009 4:59 pm

    hi,
    am just wondering if you could help me in starting my course. i haven’t started yet but wanted to know if you could tell me which books to buy for begginners. thanks

  10. sima on February 6th, 2009 6:22 am

    AOA I am Assistant Finance Manager in Alpha Chemicals Private lLimited, Lahore-Pakistan I want knew about Accural Entries. We have missed one month electricity bill. what is the accural entry of one month lost bill.

    Suggestion: you may ask for the bill and insert the method of payment under accounts payables in the detailed expenditure for the month while its related to the previous month period, its legal in accounting system

  11. Mbarak on March 18th, 2009 8:01 am

    Please add me in the list.

  12. Sekou on April 16th, 2009 11:01 am

    Hi, I am a Internal Auditor at a bank in Liberia, Could you please give me the statement of Cash flows used by a bank?

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  14. Abdirahman on June 13th, 2009 1:58 am

    Hi Iam new an accountant in org, I need help in financial analysis if there any need to help me he can e.mail me.

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  15. Muba on July 11th, 2009 9:11 am

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  16. Dee on July 19th, 2009 9:11 am

    I am taking a financial course and need some help identify financial status of BP reviewing statements on internet and it looks like profits have increased from 2007 to 2008 but just not sure I am reading correctly. Thanks

  17. Laksh on September 7th, 2009 2:40 pm

    Sima,

    In any business transaction, you need to book and pay for an expenditure. For accruals of an electricity bill, you should pass this entry

    Debit Electricity
    credit provision for exps

    When you actually pay this,

    You pass this entry

    Debit provision for exps
    Credit bank or cash.

    Normally, you accrue the following expenses. So, at the end of each month, you pass the following entry.
    Debit
    Exps for electricity
    exps for rentals
    exps for transport
    exps for energy and water
    exps for telephones

    Credit provision for exps with the sum of the above.

    When you actually receive a bill from the supplier for each of these account,

    you pass this entry.

    debit prov for exps
    and credit supplier ( XYZ Co)

    and when you pay,

    either debit prov for exps
    or debit the supplier
    and credit cash /bank.

    cash out means reduction in bank balance or cash.
    Cost booking does not necessarily mean cash /bank reduction. This is accrual.

    Since a business entity is presumed to continue for beyond a closed time period, we need to accrue for expenses and income.

    Hope this helped …

    Cheers!!!

    Accruals are necessary to know whether we actually earn profit in an accounting period, generally a month.

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