How Does Cash Flow From The Balance Sheet To The Profit and Loss?

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• Cash flows in and out – we all know this.
• Cash also flows sideways as in from one account to another.
• When cash flows in it can be in many forms:
• Someone loaned us money and now we have to begin paying it back.
• We made a sale and someone paid us for it.
• We made a sale last month (ie we had a receivable) and now someone is paying for it.
• We had loaned someone else money and now they are paying us back.
  • When Cash Flows out it also has many forms:
  • We paid for something.
  • We loaned somebody money.
  • Somebody loaned us money and now we are re-paying it.
  • We entered a bill last week and now we are paying it.
  • We simply take money out of the company – owner/shareholder distributions

Depending on the transaction, in double entry bookkeeping  there are always 2 things happening and in many cases more than 2. In some cases you are actually doing 2 or more of the above in one transaction. When posting transactions in QuickBooks there are things going on behind the scenes. You don’t see it, but QuickBooks is really just giving you a nice UI for what is really entering lots of debits and credits. For example when we re-pay a loan there is usually interest involved so there are 3 components of the transaction;

• Cash is reduced by the total amount of the payment
• The payment is broken up in to 2 components:
  • Principal (reduces a liability on the Balance Sheet)
  • Interest (increases an expense on the profit and loss)

Let’s look at a few examples of what this all looks like in QuickBooks. In order to show you very clearly the full impact of each transaction on the financial statements we are going to create a brand new QuickBooks company file for this web cast. Here are the transactions we’ll take a look at and then enter into QuickBooks. For each transaction we will look at how the Balance Sheet, Profit and Loss, and the Statement Of Cash Flows are affected.

First a quick overview of the 3 aforementioned financial statements:

Balance Sheet – this is the first one we should be looking at. The balance sheet is a snapshot. A moment in time look at where we stand in terms of Assets, Liabilities, and the difference – Equity. Report date is one specific date, like 12/31/09

Profit and Loss – a measure of the performance of our company over a specified period of time. This is a look at a period of time and how much revenue we earned, how much we’ve incurred in expenses, and the difference is out net income for the period. Report date is a range – 1/1/09 – 12/31/09

Statement Of Cash Flows - This is a reconciliation from our net income on the Profit and Loss to the Cash balance at the end of the period on the Balance sheet. This assumes we are on the accrual method of accounting.

Now let’s look at some transactions:

1. Let’s sell our services for $1,000. We post an invoice then look at the transactions on the financial statements (Balance Sheet, P&L, and Statement of Cash Flows)
2. Let’s get paid for that invoice and see what that looks like.
3. Let’s borrow $10,000 on a line of credit from Bank of Nerd.
4. Let’s make our first payment with interest.
5. Let’s get a bill for rent and enter that.
6. Let’s pay the bill
7. Let’s loan someone $10,000
8. Let’s receive our first payment on that loan including interest.

Video Tutorial - Click to watch

The full version of this QuickBooks webcast will be available in our Learning Center soon and will include the spreadsheet guide used as well as all of the notes here. If you are interested in it please register and log in on this blog and post your comments or e-mail me at classes@nerdenterprises.com