What’s The Difference Between Cash and Profit?

A dental practice’s financial statements have a bunch of different items listed. Most dental practices use the cash basis method on their financial statements. Basically, this means that income is recorded when the cash is collected as opposed to when the work is performed. So why at the end of the year does your remaining cash balance never equal your dental practice’s profit? There are a couple of main reasons and here they are:

  1. Depreciation. If you buy a piece of dental equipment and get a loan to pay for it, you may take an accelerated depreciation method to expense it all in year one of the purchase. So, your cash outflow is only the monthly loan payment, whereas your dental practice expense is the entire cost of the equipment. This isn’t quite as good as it sounds though, as in year two the opposite will occur. You will have to make the monthly loan payment, and won’t be able to take an expense for it (other than the interest on the loan), since you already depreciated the asset in year one.
  2. Loans / Debt. If you’re collecting on a loan receivable, you will have cash coming into the dental practice, but only the interest income affects your profit. The principal payments received don’t get recorded as taxable income on your income statement. Conversely, if you have a loan payable or debt, the interest expense is the only part of the payment that affects your profit.  Therefore, you will have a cash/profit difference at the end of the year.
  3. Tax Adjustments. Some of your cash outflows are not deductible. For instance, only half of your meals and entertainment are a tax deduction. Also, club dues, penalties, and federal taxes are not deductible. So if you are paying these from your dental practice, you have a cash outflow, but not an expense, thus creating a cash and profit differential.
  4. Distributions. If your practice is an S-corporation or a sole proprietorship, you may take a draw or a distribution when you have cash available. If you do this, you are taking cash out of the practice, but this is not an expense on the corporation’s books. Similarly, you do not include this as part of your income on your individual tax return.

Dental Cash and Profit Help

There are other reasons why cash and profit could differ for a cash basis taxpayer, but these are some of the common points. If you need any other help understanding your financial statements, contact our team of Bright Dental CPAs today.

By Alan Hill, CPA (Mentor office)