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For all for-profit organisations, they aim to earn profits from the business activities they have carried out. Profit is a financial gain an organisation earns, and it is the difference between the amount of money earned and the spending of a company. There are three types of profits, which are gross profit, net profit and operating profit. If you find differentiating them difficult when generating financial statements, do not hesitate to hire an accounting firm in Singapore.

In this article, we will focus on the relationship between the net profit and operating profit that a company has generated. Net profit is the sum of income remaining after the company has deducted all the expenses incurred, the interest expenses, as well as taxes. In simple words, this is the profit that the company has earned from various sources after the deduction of all expenses (Also see Understanding What Are Non-cash Expenses? ). As against, operating profit is the income remaining after deducting all the costs and expenses the company has paid to run its business operations.

Net profit can be positive or negative. People often use it as an indicator that reflects the company’s ability in earning profits from its sales. By looking at the net profit, we get to know the profitability of a business as well as the amount of profit the company has earned in an accounting period. To calculate the net profit, we should work out the difference between the sum of revenue (Also see Introduction to Deferred Revenue) earned and the sum of expenses incurred. We can also calculate this figure by deducting interest expenses and taxes from the operating profits.

Operating profit, on the other hand, is the profit that a business has generated from its operations and core business activities. It includes neither the profits the company has earned from any investments made nor the profits earned from interests on the cash deposited in the bank savings account. The calculation of operating profits involves the deduction of operating expenses from the company’s gross profits.

The main difference between the net profit and operating profit is that the former is the sum of income left after the company has paid for all the costs incurred, while the latter is the total income left after deducting operating profits from the gross profits. People often use the net profit to determine the sum of profits a company has made in an accounting (Also see An Overview of Accounting Procedures) period. If they want to know how the company manages its expenses and resources, studying the operating income will be more suitable.

Both net income and operating income will appear in the profit and loss statement of a company. The readers of the financial statement will be able to know the company’s profitability and the sum of profits earned by looking at these two amounts. Thus, both are handy tools, and they can provide a clear picture of the financial health of the business to the readers.

Non-cash expenses are the expenditures incurred without involving cash payments. However, business owners should still record these transactions in the company’s profit and loss statement in the accounting period those costs were incurred. If you are not familiar with the accounting treatments that are related to non-cash expenses, feel free to contact an accounting firm in Singapore, and the experts are always ready to help.

Although business owners do not need to pay cash (Also see Types of Cash Flow Activities – Cash Flow from Financing Activities) for those expenses, they should still record these transactions in their books of accounts. This is because according to the accrual basis of accounting (Also see Basics of Cost Accounting ) , one should record the transactions once they happen. Thus, even though the non-cash expenses do not involve the payment of cash, we still need to record them.

Depreciation is probably the most common type of non-cash expenses a company may incur. When business owners purchase assets for their companies, they need to reduce the value of those assets as they are subject to wear and tear, and they will become obsolete as time passes. They need to record the reduction in value as an expense in the profit and loss statement every year. This is a non-cash expense, and people would call it depreciation.

The concept of amortisation is the same as that of the depreciation. The only difference is that depreciation is for tangible assets, whereas amortisation is for intangible assets. When the company incurs an amortisation expense, it means that the company has written off an intangible asset over its expected useful life. This is also a non-cash expense as the company does not need to pay cash for it.

Apart from depreciation and amortisation, the unrealised gains and losses are also non-cash transactions. In the case of unrealised gains, the investors feel that the investment will bring them a profit. However, in fact, they did not earn any profit in cash, but this is just on the paper. Thus, this is a non-cash transaction. The same concept applies to unrealised losses, and in this case, the investors think that the possibility of suffering from future loss is higher. As this only happens on the paper and it does not involve cash payment, this is a non-cash expense.

Some companies may create provisions for losses that they think may happen in the future. This is because if the company chooses to sell some of its products or services on credit, there will be a possibility where they will not be able to collect the full amount in cash in the future. There may be cases where the customers do not pay at all. The amount of money that the company would not be able to collect is called bad debt. To protect their own interests, companies may create provisions for bad debt (also known as the allowance for doubtful accounts) before the bad debt happens. Such expenses also fall under the category of non-cash expenses as the company does not pay out cash too.

In a nutshell, keeping records of non-cash expenses in the profit and loss statement is necessary as this allows us to determine the net income (Also see How Do Net Income and Gross Income Differ from Each Other) of the business. One thing to note is that business owners should add back the non-cash expenses when they calculate the company’s free cash flow (Also see How to Prepare a Cash Flow Statement by Using the Direct and Indirect Methods?) to obtain the exact cash inflow and outflow.

Deferred revenue refers to the payment from the clients for the goods and services they will receive in the future. In this case, the seller has to record this as a liability since he has not earned the revenue (Also see How Should We Classify Unearned Revenue?). To insurance agents and software providers, deferred revenue is something common as they will require advanced payments as they are going to provide the service for a period, probably for many months.

Recognition of Deferred Revenue

Eventually, the recipient will earn the revenue, and this reduces the balances of the deferred revenue account, which has a debit balance. At the same time, it will increase the balances of the revenue account, which has a credit balance. According to the contract terms, there is a possibility where the selling entity can only recognise the revenue when it has delivered the goods or provided all the services. Hence, at the early stage, the business may show losses, but this will be followed by profits afterwards.

Typically, the deferred revenue account falls into the category of current liability in the company’s balance sheet. If the company does not expect to see its performance in the next 12 months, then it can classify it as a long-term liability.

Accounting (Also see An Overview of Accounting Procedures) for Deferred Revenue

As an instance, XYZ corporation employs Spring Garden to mow its lawns. XYZ corporation paid RM12,000 in advance to Spring Garden as they request them to give the priority of mowing their lawns first. When XYZ corporation pays the fees, Spring Garden has not earned the revenue (Also see The Concept of Revenue Recognition) yet. Therefore, Spring Garden will record the RM12,000 in the deferred revenue account by using the entry below:

– Debit RM12,000 to cash

– Credit RM12,000 to deferred revenue (liability)

Spring Garden has agreed to mow the lawns for XYZ corporation for a year. So, throughout the 12 months, Spring Garden will recognise RM1,000 of the deferred revenue monthly. The entry it records will be:

– Debit RM1,000 to deferred revenue (liability)

– Credit RM1,000 to moving revenue (revenue)

It may be difficult for you to understand the concept of deferred revenue, especially if accounting (Also see Comparing Computerised Accounting and Manual Accounting) is not your thing. Thus, as a business owner, you should consider hiring an accounting firm Singapore so that you can always keep a tight grip on your business’s finances.

If you are new to financial accounting, net income and gross income are two terms that you must understand. Both of them are crucial in presenting the profitability of a business. As a business owner, you need to know the correct ways of calculating them so that you get to analyse the exact financial position of your company. If the accounting tasks are too time-consuming and you cannot afford to hire an in-house full-time accountant (Also see How Do the Accountants Reconcile the Accounts?), why don’t consider engaging an accounting firm in Singapore? The professionals will be able to keep your books of account always updated and ensures the accuracy of your accounting (Also see Do You Know What Are Accounting Controls?) records without costing you much.

Firstly, let us look at what do net income and gross income mean. Net income is the sum of money remaining after the deduction of all the expenses incurred in the company from the gross income. This portion is the amount of the company’s earnings. On the contrary, gross income is the income (Also see Importance of Statement of Comprehensive Income) of the business after the company subtracts the cost of goods sold from the revenue generated.

In other words, if we want to calculate net income, we need to deduct all the operations, administration and management expenses from the gross income generated. If we’re going to calculate gross income, we should deduct the cost of goods sold from the company’s net sales. Thus, from here, we get to know that the amount of gross income will always be higher than that of the net income.

When you look at the profit and loss statement of your company, the first item that appears on it is the gross sales. To calculate gross sales, you need to multiply the number of products sold with the price per unit of the products. Then, if there is any sales returns or sales discount and you subtract them from the gross sales, you will get the net sales.

After calculating the net sales, you should subtract the cost of goods sold from it, and this will result in the gross income. We will be able to tell the amount close to the exact sum of money the company has earned by looking at this sum. Next, to calculate the operating income (Also see What Can You Find in an Income Statement?) of your business, you need to subtract all operating expenses incurred from the gross income. Deducting the taxes and interest expenses from the operating income will result in the net income.

Net income plays a crucial role in telling the financial position of a business as it shows the amount of money the company has for it to pay a dividend to its shareholders or to reinvest those sums back into the business. On the other hand, we get to know the amount of money a company has earned after deducting the cost of goods sold from its net sales by looking at its gross income. Thus, both net income and gross income of a business are vital if one intends to understand the financial performance of the company.

When it comes to the preparation of financial statements, one will need to master a lot of skills and methods required to generate those statements accurately. This is why some of the business owners prefer hiring an accounting firm in Singapore to get this done rather than completing this task on their own. Among the crucial financial statements, the cash flow statement is the one that people require so that they get to know the sum of cash that goes into and out of the company.

In the cash flow statement, there are three types of cash flow activities, which are the operating activities, investing activities and financing activities. Usually, the accountants will calculate the amount of cash flow for investing activities and financing activities by using similar methods. However, in the case of the calculation for operating activities, there are two methods that they can use, which are the direct method and the indirect method.

If one uses the direct method, he should record all the changes in cash receipts and payments under the section of cash flow from operating activities in the statement. If he prefers using the indirect method, he needs to adjust the changes in the company’s assets and liabilities in its net income when calculating the sum of cash flow from operating activities.

The direct method only includes cash transactions to generate a cash flow statement. In other words, it only takes the cash receipts and cash payments into account. Typically, the direct method shows the gross cash receipts and cash payments of specific line items. Some examples include the cash that the company has received from its customers, paid to the suppliers for the goods and services bought, as well as cash payments to the employees. Other receipts or payments include the interests and taxes paid, and other cash received or paid.

On the other hand, the indirect method takes the company’s net income as a base before adding the non-cash expenses incurred and deducting all non-cash incomes from it. The former may include depreciation and amortisation expense, while an example for the latter is the sale of scraps. Also, he needs to make some adjustments before producing the cash flow statement.

In conclusion, both the direct method and indirect method for the preparation of cash flow from operating activities have their own advantages and disadvantages. Business owners or the accountants (Also see How Do the Accountants Reconcile the Accounts?) may decide the method they want to use based on their needs and situation.