In case of a new movie when we see the movie teaser we get to see 2 minutes video of main characters of the movie and role of all other characters of the movie is revealed only when we see the full movie. In case of accountancy cash flow statement is like the teaser of the movie where the main character is the cash and we get to see details of only cash related transactions while profit and loss account is like a full movie where we get to see not only cash related transactions but also all other transactions of the business of the company. Cash flow statement and profit and loss account both are types of financial statements used by the companies for ascertaining the financial position of the company but both serve a different purpose for the company and that is the reason why one should know the differences between cash flow statement and profit and loss account –
Cash Flow Statement and Profit and Loss Account Differences
Meaning
Cash flow statement in simple words refers to that statement which reveals the cash position of the business between two financial years while profit and loss account refers to that statement which shows whether a company has earned profit or loss between two financial years.
Scope
The scope of cash flow statement is limited because it reveals only cash related transactions of the business while the scope of profit and loss account is wide as apart from cash related transactions it reveals other transactions also which have bearing on the profit of the company. In simple words, cash flow statement is like a solo star movie where cash is the only star while profit and loss account is like a multi-star movie where there are many stars and not just one star.
Liquidity versus Profitability
If company wants to know about liquidity that is whether there is surplus cash or shortage of cash in the business than cash flow statement is more accurate indicator than profit and loss statement but when it comes to knowing the profitability of the business during the year than cash flow statement is of no use as profitability during a year can be judged only after looking at profit and loss statement of the company.
Segregation
Cash flow statement can be segregated into three headings that are cash flow from operating activities, cash flow from investing activities and cash flow from investing activities while profit and loss account is segregated into two columns one is debit column which records all the expenses and losses made by the company during the year and other is credit column which records all the incomes and gains made by the company during the year.
Example
An example of cash flow statement is suppose company has done total sales of $100000 out of which cash sales is $60000 and rest is credit sales than cash flow statement will record only $60000 of sales under the heading cash flow from operating activities whereas as far as profit and loss account is concerned it will record both cash as well as credit sales on the credit side of profit and loss statement.
Double Entry System
The double entry system is the founding principle of accountancy which states that for every debit entry there should be corresponding credit entry. In the case of cash flow statement companies do not follow the double entry system but when it comes to Profit And Loss Statement Company follows the double entry system.
As one can see from the above differences that both cash flow statement and profit and loss account serve a different purpose for the company and that is the reason why the majority of companies prepare the statement of cash flow in addition to profit and loss statement even when it is not compulsory to prepare statement of cash flows.