What is the difference between cash flow and accounting income

The accounting income, however, reflects the overall profits and losses that companies report from operational activities. Cash flow and accounting income relate to one another, as net income can affect a company's statement of cash flows.

For instance, when a business sells to a customer, it records the transaction in the accounts receivable at the time of the transaction, even if the business won't receive payment until a later date. The business's income statement still reflects the transaction, however, cash receipts and payments then impact the business's cash flow.

On the cash flow statement, the accounting income is the first-line item, which represents the cash a company has on hand to reinvest in business processes and make payments to shareholders. In this way, the company's accounting income is an important factor in its financial position. Find jobs. Company reviews. Find salaries. Upload your resume. Sign in. Career Development. What is cash flow? What is accounting income? Cash flow versus accounting income.

Accounting methods. Financial reporting. Planning implications. Profit and loss versus liquidity. Importance of accounting income on the cash flow statement. What Is the Buying Process? Tim Stobierski Author Contributors. In actively growing and expanding companies, positive cash flow is required to maintain business growth.

In healthy companies that are actively investing in their businesses, this number will often be in the negative. Financing cash flow: This refers specifically to how cash moves between a company and its investors, owners, or creditors. Go to the alternative version. What Is Profit? Like cash flow, profit can be further broken down into three categories: Gross profit: Gross profit is defined as revenue minus the cost of goods sold.

It includes variable costs, which are dependent upon the level of output, such as cost of materials and labor directly associated with producing the product. Operating profit: Like operating cash flow, operating profit refers only to the net profit that a company generates from its normal business operations.

It typically excludes negative cash flows like tax payments or interest payments on debt. Similarly, it excludes positive cash flows from areas outside of the core business. Net profit: This is the net income after all expenses have been deducted from all revenues. Typically, this includes expenses like tax and interest payments. Accrual basis is generally more useful for getting an accurate picture of the company's financial condition, but the company's real cash flow cannot be ignored, because its ability to make good on debts or pay employees will be limited by the availability of actual cash.

The difference between cash flow and income is very important. In some situations, a company may need positive cash flow even more than it needs income -- companies may find themselves in bankruptcy even though they technically are profitable. This is why investors often consider both a company's income potential as expressed by its income statement alongside its ability to effectively manage its liquidity. A highly profitable investment with negative cash flow may be more risky than a significantly less-profitable opportunity that has a stable cash flow.

Matt Petryni has been writing since He was the environmental issues columnist at the "Oregon Daily Emerald" and has experience in environmental and land-use planning.