Profit and money are two different things, and both are correct. Profit is generated the moment you sell and issue the invoice. Money is generated the moment the client pays. Weeks or even months can pass between these two moments, and that's precisely where the answer to your question lies. Your money is often tied up in unpaid invoices, in inventory, or in loan installments, not in your bank account.
Accounting measures your business with two hours at the same time.
The first clock is the profit clock. It moves when work happens. When sales occur, the clock records revenue. When goods are consumed, the clock records an expense. This clock doesn't care at all whether the money has moved.
The second clock is the money clock. It only moves when money enters or leaves the account and the cash register. This clock doesn't care at all when the work was done.
Both clocks tell the truth, but different truths. Karen Berman and Joe Knight make it clear in Financial Intelligence: profit is a concept built on rules, while money is a fact that can be counted. Problems arise when the owner reads one clock and believes he's reading the other.
This is the example that explains everything, so read it slowly.
On the 5th of the month, you sell goods worth 100,000 LEK. The goods cost you 80,000 LEK, which you paid the supplier last month. The client is reliable but pays on a 60-day term.
What does the end-of-month profit clock say? Revenue: 100,000 LEK. Cost of goods sold: 80,000 LEK. Profit: 20,000 LEK. True and documented with an invoice.
What does the money clock say on that same date? The entry from this sale is zero LEK. The client still hasn't paid. In fact, your account is 80,000 LEK lighter than it was a month ago, when you paid the supplier.
So you simultaneously have a gain of 20,000 LEK and a cash outflow of –80,000 LEK from the same transaction. Your profit exists, but today it lives in the customer's invoice. It will become cash in 60 days, if the customer pays. This is why a profitable business can run out of cash for payroll, and why the collection period is just as important as the price.
The simplest tool against this trap is a live list of unpaid invoices, with the invoice date, due date, and days overdue. In the Resource Center you'll find a ready-made template that sorts them automatically by delinquency. You can find it at Resource Center.
The basis of this distinction is the accrual principle. The effects of transactions are recognized when they occur and reported in the period to which they belong, not when cash is received or paid. This principle underpins accounting under Law No. 25/2018 and the standards implemented under it.
The moment of recognizing revenue from the sale of goods is determined in the relevant revenue standard and is linked to the transfer to the buyer of the risks and rewards of ownership, the ability to reliably measure the amount, and the likelihood of collection. In Albanian practice, with electronic invoicing, the invoicing moment and the recognition moment usually coincide for ordinary sales of goods, but not necessarily for prepayments and long-term contracts. Precisely with prepayments, which are deferred income rather than instantaneous income, the economist adds value for the owner who enjoys it ahead of time.
For management reporting, a useful bridge is the monthly profit reconciliation with the bank statement. The result, plus depreciation, minus the increase in receivables and inventory, plus the increase in payables. Three lines that explain to the owner, using his own figures, why profit and the bank statement don't match.
Yes, the profit from that sale is recognized over time. An uncollectible invoice is written off as a loss under the applicable rules, and the result is adjusted. Therefore, collecting payments is not a clerical task; it is profit protection.
For your day-to-day decisions, you can keep whatever helps you. But the official statements are prepared on an accrual basis in accordance with the law and standards. The practical solution is to read both clocks together every month.
If this topic resonated with you because your paper gain and your account don't speak the same language, write to us at Contact page. Let's look at it together with your actual figures.
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