Business profit, the goal of every business endeavor and the financial “fuel” of your company, receives special attention at the end of the fiscal year, when accounts are reconciled and financial statements are prepared.

During this period, entrepreneurs often compare their own estimates with those of their accountants — and it’s not uncommon for them to be surprised by discrepancies. Since accounting records are authoritative, entrepreneurs often try to understand how the accountant arrived at those numbers. The more transactions a company has had during the year, the harder it becomes to identify and explain the differences.

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What Causes the Discrepancy?

The main source of discrepancies lies in the different methodologies used by entrepreneurs and accountants.

• Accountants follow a strictly regulated methodology, defined by legal and professional accounting standards. Most transactions are treated according to well-established rules. In the case of complex or unusual transactions, accountants apply professional judgment to ensure alignment with accepted accounting principles.

• Entrepreneurs, on the other hand, often use a more intuitive approach — they might:

  • Count only actual payments received from clients,

  • Include all issued invoices as income,

  • Treat large purchases (real estate or equipment) as immediate expenses,

  • Simply track the bank account balance as a measure of success.

This article focuses on the last group — those who equate business success with the amount of money in their business bank account.

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Why Is My Book Profit Different from My Bank Balance? Did My Accountant Make a Mistake?

To understand the difference between the booked profit and available cash, you need to know that Serbian accounting — like international standards — is based on the accrual accounting principle (also known as the invoice-based principle).

This principle means:

• Revenue is recorded when a sale is made and invoiced, not when the payment is received.

• Expenses are recorded in the period in which the related revenue is earned, or in the period they relate to (e.g., electricity bills, legal and accounting services, employee salaries).

💡 Not every cash outflow is an expense in accounting terms.

Examples:

• Purchasing inventory that is stored for future sale is not an expense until the goods are sold.

• Buying real estate or equipment is recorded as an increase in assets, not as an expense. Their cost is expensed gradually, through depreciation.

• Paying a rental deposit is not an expense, because the deposit is expected to be returned. It is recorded as a receivable from the landlord.

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Example: How Profit Differs from the Bank Account Balance

Let’s say a company issues 12 monthly invoices of RSD 100,000 each during the year (payment term: 10 days).

At the beginning of the year, the company:

• Pays a rental deposit of RSD 50,000,

• Pays the full annual rent of RSD 500,000 in advance.

The company started operations that year with zero bank balance.

By December 31, 2024, the company has:

• Collected 11 invoices (RSD 1,100,000 total),

• Paid rent and deposit (RSD 550,000 total),

• Ending bank balance: RSD 550,000,

• The 12th invoice (for December) was issued but will be paid in January 2025.

According to accounting records:

• The booked revenue is RSD 1,200,000, including the December invoice.

• The recognized expense is RSD 500,000 (annual rent).

• The deposit is recorded as a receivable, not an expense.

Thus, booked profit = RSD 700,000, even though the bank balance is only RSD 550,000.

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Key Drivers of Differences Between Profit and Cash:

1. Uncollected revenue – invoices issued but not yet paid (accounts receivable).

2. Non-expense payments, such as:

   • Deposits, which are treated as receivables.

   • Capital expenditures (real estate, equipment), which are recorded as assets and expensed gradually via depreciation.

3. Unpaid supplier invoices – expenses are recorded even if the payment is pending.

4. Loans and owner contributions – funds received increase cash but are recorded as liabilities; repayments decrease cash but only interest is recognized as an expense.

5. Amortization of assets – recorded as an expense without a corresponding cash outflow.

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What If My Cash Is High but the Business Shows a Loss?

It’s possible for a company to have a healthy bank balance and still report a loss. Some common reasons:

• The cash may be from past periods.

• The company might have unpaid liabilities, such as vendor invoices or taxes, which are already booked as expenses but not yet paid.

• Received loans or prepayments that inflate the cash balance but do not affect profit.

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Conclusion

As businesses grow and operations become more complex, reconciling profit and cash flow requires careful analysis. If your accountant reports a high profit while your bank balance is low, it doesn’t necessarily mean there’s an error — your cash may be tied up in receivables or prepayments. Conversely, a large bank balance may mask financial problems, such as upcoming liabilities or unrecognized losses.

Understanding the difference between cash flow and accounting profit is key to managing a successful and financially healthy business.