Cash is money moving, profit is income earned minus expenses used, and capital is the owner’s stake. A transaction can change one, two or all three, and sorting them is the first skill in Accounting.
This page is for the student in a first lesson. After it, applying the accounting equation will make more sense.
How can a business have cash but no profit?
Start a business with RM10 000 of your own money. You have RM10 000 cash, and you have not earned anything yet. That cash is capital.
Buy RM4 000 of goods with that cash. Cash falls to RM6 000, but the goods are an asset, so nothing is lost. There is still no profit.
Worked month: a fictional phone case stall
Here is an original example. In one month, a phone case stall has these events:
| Event | Cash | Profit | Capital |
|---|---|---|---|
| Owner puts in RM10 000 | up RM10 000 | no change | up RM10 000 |
| Buys goods for RM4 000 in cash | down RM4 000 | no change | no change |
| Sells half the goods for RM3 500 cash | up RM3 500 | up RM1 500 | up RM1 500 |
| Sells the rest for RM3 500 on credit | no change | up RM1 500 | up RM1 500 |
| Owner takes RM1 000 for personal use | down RM1 000 | no change | down RM1 000 |
Profit is the RM1 500 from each sale, which is RM3 000 in total. The cash is 10 000 − 4 000 + 3 500 − 1 000 = RM8 500. The capital is 10 000 + 3 000 − 1 000 = RM12 000.
Notice that profit is RM3 000 but cash is RM8 500 and capital is RM12 000. Three different numbers, all correct. The credit sale is part of the gap: RM3 500 is owed to the stall but not yet received.
A habit that separates them
For every transaction, answer three questions in a small three-column table.
- Did cash move?
- Did the business earn income or use up an expense?
- Did the owner put something in or take something out?
If the answer to question 3 is yes, profit is unaffected. If question 2 is yes, capital changes through profit. The table feels slow in week one and natural by week three.
Try it with a tool
The cash profit and transaction timeline lets you place events on a timeline and watch the three figures move separately. For the personal versus business distinction, read separating personal and business transactions.
When one-to-one tuition may help
If the three ideas still mix after a few weeks, a teacher can use your own notes and build the same table with transactions from your school’s exercises. The aim is that you explain the difference in your own words.
See online one-to-one Accounting tuition for how starting works.