Accounting income is distinct from cash flows, particularly money a business has in its coffers at the end of given period such as a month or fiscal year. Various regulatory guidelines highlight these distinctions, telling businesses how to record and report revenue and expense data. These guidelines primarily come from the Financial Accounting Standards Board, the U.S. Securities and Exchange Commission and the American Institute of Certified Public Accountants.
Accounting income equals total revenues minus total expenses, but a variety of indicators, including gross income and operating income, make it into a company's profitability line. Gross income equals total sales revenue minus cost of goods sold, also referred to as inventory outlays or material expense. Gross income minus operating expenses, including things like salaries, rent and insurance, equals operating income. When you subtract non-operating outlays -- such as the one-time renovation of a production plant after meteorological damage -- you get taxable income, which becomes net income after settling fiscal debts. In a financial dictionary, the terms " accounting income" and "net income" are identical.
Cash flow touches on money coming in and exiting a company's operating vaults. Liquidity management is what finance people call the hodgepodge of initiatives an entrepreneur takes to make money during one period, make more of it over time, reduce expenses quarter after quarter and maintain a profitable business down the road. A liquidity report or cash flow statement is a data synopsis that provides insight into cash flows from operating, investing and financing activities.
Accounting income has nothing to do with cash flow, but both concepts interrelate. Ideally, net income translates into money, but this doesn't happen if customers face financial tedium and can't remit funds. This is why a business owner must set policies -- and even enlist the help of collection agencies, if needed -- to monitor client remittances, identify customers facing economic difficulties and initiate litigation against patrons who don't want to pay or are willing to sign repayment plans. All these policies prevent the company from incurring losses, so it doesn't feel lost competitively and out of step with what cash managers, lenders and investors recommend.
Financial Reporting Implications
Cash flow management covers a liquidity report, whereas accounting income is part of an income statement, also known as P&L, report on income and statement of profit and loss.
- Lakeshore Bookkeeping Services: How to Read the Income Statement
- Ohio State University Fact Sheet: The Profit and Loss Statement - What Does It Mean?
- Federal Housing Finance Agency: Liquidity Management
- University of Northern Iowa John Pappajohn Entrepreneurial Center: Cash Flow Statement
- Jacksonville State University: Statement of Cash Flows