【正文】 ill is paid? Using accrual accounting, the retail business still shows a profit, but what about the bills it has to pay during the six months that pass? It will not have the cash to pay them, despite the profit earned on the sale.As you can see, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat narrow, and only looks at ine and expenses at a certain point in time. Cash flow, on the other hand, is more dynamic. It is concerned with the movement of money in and out of a business. More importantly, it is concerned with the time at which the movement of the money takes place.Truthfully, the concept of cash flow is more in line with reality. If you use the accrual accounting method, it is helpful to know how to convert your accrual profit to your cash flow profit.To fully understand the difference, you need to bee familiar with:accrual accounting vs. cash accountingconverting accrual profit to cash flow profitchanges in accounts receivablechanges in inventorychanges in accounts payablechanges in notes payableprofit vs. cash flowAccrual vs. Cash AccountingIf you keep your books on the cash method of accounting, this section doesn39。t apply. If, however, you keep your books on the accrual method of accounting, then please read on.Without waging into the details of accrual accounting, understand that it is an essential tool for the financial management of your business. Primarily, it shows the performance of your business over a period of time by matching ine and expenses.Regardless of the cash flow, the accrual method of accounting recognizes ine when a sale is made. Likewise, it recognizes an expense when the expense is incurred. Most accountants remend using the accrual method because they feel that it is the most accurate method for measuring how your business is doing. In fact, for some types of businesses, you must use the accrual method.However, accrual accounting does have some drawbacks. The main disadvantage being the timing difference it creates between the recognition of ine and expense transactions, and the actual inflows and outflows of cash.The cash method of accounting records the actual flow of cash through a business. It recognizes ine when cash is actually collected from a sale. It recognizes expenses when cash is actually paid out, or when a check is written to pay a bill. It is not concerned with matching ine and expenses, but rather the actual inflows and outflows of cash. This method of accounting more closely resembles your cash flow.Converting Profit to Cash FlowIf you keep your books on the accrual method of accounting, you39。ll have to make some adjustments to determine your actual cash flow. These adjustments are necessary due to certain expenses taken into account to determine your accrual net profit, even though these expenses do not currently require a cash outlay. To convert your accrual profit to your cash flow profit, you need a balance sheet for the beginning and end of the period under examination.As a general rule, you can convert your accrual net profit using the following formula:Net Profit + Depreciation Increases (or + Decreases) in Accounts Receivable Increases (or + Decreases) in Inventories+ Increases (or Decreases) in Accounts Payable Decreases (or + Increases) in Notes Payable (Bank Loans)= Net Cash FlowUnderstanding Depreciation and Cash FlowDepreciation is an expense deducted from your business ine to reflect the annual cost of assets used in your business. Since the depreciation deduction is purely a paper expense, it requires no cash outflow. If you use the accrual method of accounting, depreciation must be added back to your accrual net profit to determine your cash flow profit.Dealing with Changes in Various Financial ItemsDo you use the accrual method of accounting but want to pute your cash flow profit?If so, any increase in accounts receivable must be subtracted from your accrual net profit because it represents sales included in the net profit, but not yet collected in cash. Similarly, to determine your cash flow profit, any decrease in accounts receivable must be added to your accrual net profit because it represents cash collections that are not included in the net profit for the current accounting period.Tip：These adjustments are fairly simple if you think about the reasoning behind the adjustments.In terms of accounts receivable, when a sale is made to a customer, the sale is recorded and the customer39。s credit account is increased by the amount of the sale. When the sale is recorded, your accrual ine is increased by the amount of the sale, but no cash is collected until the customer pays his bill. To convert your accrual net profit to cash, you must subtract an increase in accounts receivable. The increase represents ine that has been recorded but not yet collected in cash.A decrease in accounts receivable has the opposite effect — the decrease represents cash collected, but not included in ine.Changes in InventoryIf you use the accrual method of accounting, any increase in inventory must be subtracted from your accrual net profit amount to determine your net cash flow profit. The increase in inventory represents an expense that was paid but not yet subtracted from your accrual net profit. Under the mechanics of accrual accounting, the purchase of inventory is not considered to be an expense until the inventory is sold. In terms of a cash flow, you39。ve already paid for the inventory。 therefore, it must be subtracted from your accrual net profit.Similarly, a decrease in your inventory amount must be added to your accrual net profit to determine your net cash flow. The decrease in inventory represents an expense subtracted from your accrual ine to determine your accrual net profit. However, no cash left your business in this accounting period for the expense r