Accounting For Dummies®, 4th Edition

4.4. Summing Up the Financial Effects of Profit

NOTE

Business managers should understand not only how to make profit, but also the financial effects of making profit. Profit does not simply mean an increase in cash. Sales revenue and expenses affect several assets other than cash and operating liabilities. I realize that I make this point several times in this chapter, so forgive me if I seem to be harping. I simply want to drive home the importance of understanding this fact.

Making profit involves additional transactions that are closely allied with sales and expenses. These tightly connected transactions include the following:

• Collecting cash from customers for credit sales made to them, which takes place after recording the sales revenue

• Purchasing (or manufacturing) products that are put in inventory and held there until the products are sold sometime later, at which time the cost of products sold is charged to expense in order to match up with the revenue from the sale

• Paying certain costs in advance of when they are charged to expense

• Paying for products bought on credit and for other items that are not charged to expense until sometime after the purchase

• Paying for expenses that have been recorded sometime earlier

• Making payments to the government for income tax expense that has already been recorded

These allied transactions are the "before and after" of recording sales and expense transactions. The allied transactions are not reported as such in a financial statement. However, ...