chapter  3
7 Pages

The profit and loss account

Don’t worry if you struggled a little to explain the difference. It comes from the fact that the figure of £3,500 is calculated by taking into account both sales and purchases that have been settled in cash and those that have not. If Johnson Ltd made no transactions in December, but simply waited for the cash to roll in while paying its bills, by the end of December it would have received only £3,500 more than it paid out, as all the November transactions would have been realized in cash. The fact that its receipts and payments situation looks better than its income and expenses position at the end of November is purely down to the fact that Johnson Ltd is better at getting money in from its debtors than it is at paying its creditors.