The business has made a profit but your bank account doesn't seem to reflect this. And even worse, you're still expected to pay tax!
Profit is never the same as what you'll see in your bank account. Although the business receives income (sales) and pays business expenses, other transactions influence the bank balance. The most common are:
- Transferring regular amounts to your personal account to cover living expenses
- Personal money you deposit into the business' bank account isn't income, but it increases your bank balance
- You've made a lot of sales but if your debtors haven't paid you, the money isn't there.
- Buying a business asset may reduce your bank balance (or increase your loan balance) but the full amount cannot be claimed as a business expense.
- GST and income tax payments for the business have no impact on profit, but they will reduce your bank balance.
We've added additional information and examples of useful Xero reports in this blog.