361: Differences Between Your Bank Balance And Net Income Whether You Are Starting A Business Or Side Hustle, A Solopreneur, Entrepreneur, Mompreneur, Freelancer, Accountant, Bookkeeper, VA
- Financial Adventure, LLC
- 5 hours ago
- 10 min read
361: Differences Between Your Bank Balance And Net Income Whether You Are Starting A Business Or Side Hustle, A Solopreneur, Entrepreneur, Mompreneur, Freelancer, Accountant, Bookkeeper, Virtual Assistant, Business Owner, Or Self-Employed
There’s often a misconception when it comes to figuring out what you’ll be taxed on in your business. This is normally referred to as your net income. Many business owners will take a look at their business bank account and think this is the number they will use for their net income or what they will be paying taxes on, but it isn’t an accurate way to look at it, and it causes a lot of problems, especially if that bank account balance is lower than the actual net income. I’ve heard many times that business owners don’t think they will owe much for taxes because they only have a small dollar amount in their bank account. In today’s podcast episode, I cover some of the main reasons why there may be a gap between your bank balance and your net income. It may seem like your bank balance would be an accurate way to tell what you’ll be paying taxes on, but you’ll find out today what can cause this number to not match what your true profit and loss or net income amount. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper or accountant, a virtual assistant or VA, or other professional, when you are trying to figure out what you’re tax liability will be based on, I want you to make sure you are as prepared as possible for filing your taxes, and you don’t have any surprises pop up…
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Show Notes:
There’s often a misconception when it comes to figuring out what you’ll be taxed on in your business. This is normally referred to as your net income. Many business owners will take a look at their business bank account and think this is the number they will use for their net income or what they will be paying taxes on, but it isn’t an accurate way to look at it, and it causes a lot of problems, especially if that bank account balance is lower than the actual net income. I’ve heard many times that business owners don’t think they will owe much for taxes because they only have a small dollar amount in their bank account. In today’s podcast episode, I cover some of the main reasons why there may be a gap between your bank balance and your net income. It may seem like your bank balance would be an accurate way to tell what you’ll be paying taxes on, but you’ll find out today what can cause this number to not match what your true profit and loss or net income amount. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper or accountant, a virtual assistant or VA, or other professional, when you are trying to figure out what you’re tax liability will be based on, I want you to make sure you are as prepared as possible for filing your taxes, and you don’t have any surprises pop up…
Welcome Back…I want to ask you if you’ve ever grabbed your check register or have taken a peek at your business account online, and see that your bank account balance is relatively low. Although you may not be happy with the amount of money you have, you are somewhat hopeful that you won’t have to pay too much in taxes this year due to the low balance in your bank account. Well, this is exactly the misconception I’m covering today. The gap between your bank balance and your net income. The way that you decipher what your net income for the year will be for your business or what you could start thinking about for your taxable income will not depend on what your bank account is telling you. With the information you get today, you’ll be much more equipped to understand where the difference is and where you can genuinely look to get a better understanding of what your taxable income will look like.
First, we are going to start with what your profit and loss or net income is. Both terms are used interchangeably, and regardless of which term you use, you will arrive at the same answer. When you are calculating your profit and loss or net income, you simply take the total of all your business income or revenues and subtract all of your business expenses. This amount tells you if you have a net profit or net income when you have a positive amount, or you may have a loss if you have a negative amount. This is the number that you will use on your tax return to calculate the amount of your tax liability.
Next, let’s take a look at your bank account balance. This is generated by adding up all your deposits and subtracting your withdrawals from your bank account. It is the amount of money you have in your bank account as of a certain period of time. The best way to calculate this number is to make sure you are reconciling your bank account to ensure you are taking into consideration any withdrawals or deposits that have not cleared your bank.
If you’re an accountant or high-stress professional, you want to start enjoying your life more, both at work and at home. You’ve likely built a successful career, but at what cost? The problem is you’re so buried in deadlines and to-do lists, there’s no time or energy left for the things that really matter. You’re great at managing clients, deadlines, and numbers, but your own stress, time, and well-being, well, they always seem to come last. The constant pressure leads to burnout, guilt, and feeling like no matter how much you do, it’s never enough. I see this all the time. As a CPA with over 20 years of experience and a Certified Coach, I’ve helped high-achieving professionals like you go from stress and burnout to a more integrated and balanced lifestyle using The RE*INVENTION™ Process. This process helps you reduce stress, reclaim your time, and finally build a healthier, happier, more balanced lifestyle without sacrificing your success. The truth is, stress doesn’t go away on its own, and eventually, the cost isn’t just exhaustion; it’s your health, your relationships, and your love for the work you once enjoyed. If you’re ready to build a life you don’t need a vacation from, it’s easy to get started. First, schedule your Complimentary Stress Audit & Clarity Session, where in just one session, I’ll help you pinpoint what’s really draining your time and energy, create a personalized action plan to help you simplify your life, reclaim your time, and increase your productivity so that you start living with more energy, focus, and freedom. You don’t have to keep doing this alone. I can help you customize a plan to stop the overwhelm and start enjoying your life again. Go to www.FinancialAdventure.com, click on the Work With Me button, and book your free session today. Let this be the moment you stop just surviving and start living with more control and finally enjoy a more integrated and balanced lifestyle again. In the meantime, check out all the other resources and solutions on my website that you can immediately apply to your life so you can stop being stressed out and feeling like you're never doing enough, and instead breathe a sigh of relief at the end of the day, knowing you've accomplished enough and can enjoy your life more.
If you are still wondering why these two numbers may be different, let’s dig a little deeper. One of the reasons these numbers may be different, and a reason I see most frequently, is when a business owner takes money out of the business for personal reasons. Think about this for a minute. If you are taking money out of your business for personal reasons, it would not be considered business income, and it is not considered a business expense either, right? When you take personal money out of your business, this would be considered a draw and does not show up on the profit and loss or income statement at all. You would record these amounts on your balance sheet in your equity section since you are taking equity out of your business. You will see your business bank account go down for the amount of money you take out of your business personally, but your net income or loss will not change. If you have a situation where your bank account balance is lower than your net income, this could be one reason for the difference.
Another reason you may see a difference may depend on whether you are looking at an accrual or cash basis report. I’ll give you a quick description of each, and then I’ll explain more about why this could make an impact on the difference between your bank account balance and your net income. If you are looking at a profit and loss report that is on an accrual basis, this means that it is taking into consideration your accounts receivable and your accounts payable. Your total income is calculated on sales you have made but may not have received payments on yet, and your expenses are calculated on bills you have received but you may not have paid them yet. If you are looking at a cash basis report profit and loss report, on the other hand, there are no accounts receivable or accounts payable taken into consideration, which means that you are only looking at income that you have received payments on and expenses that you have already paid. When you think about these two reports, you could have completely different amounts for your net income if you have a high amount of receivables you need to collect from your customers or if you have a high amount of bills that you have not yet paid. If you are comparing an income statement prepared on an accrual basis, it is taking into consideration income that you have not received yet and would obviously not be in your bank account and bills that have not been paid or deducted from your bank account. This can cause a significant difference in these two amounts.
Loan payments are another way that your bank account balance and your net income can be different. When you take out a loan, your loan is recorded as a liability on your balance sheet, and when you make your loan payments, this liability on your balance sheet goes down by the principal amount when you make each payment. The only amount that would be reflected on your income statement would be the expense portion of the interest you are paying on your loan. In contrast, you will see the full amount you are paying on your loan decrease in your bank account balance.
There are many other reasons why your bank account balance may not match what your profit and loss or net income shows, but I wanted to jump into a few of the most common scenarios on this podcast. Most importantly, I want you to understand that looking at the balance in your bank account will not give you a true profit and loss or net income or net loss amount. Your bank account is essentially just capturing the money coming in and going out of your bank account, and there are times when the movement of these funds does not impact your profit and loss. If you are using a computerized bookkeeping system, you can easily pull up a profit and loss report or income statement to see what your net income or net loss is. As long as you have all your transactions recorded properly, this is the report you will want to use to start thinking about what your tax liability may be. You can run this report on a year-to-date basis or any other time frame that you want to see your net income or loss. When it comes to this time of the year, you really want to be looking at your net income or your profit and loss report to see how your finances are looking and to make decisions on any tax planning strategies for the year. You can even run comparison reports from last year to this year to see how much of a difference there is. Just make sure you are not looking at what your bank account balance is showing to determine what your tax liability will be based on. I know this can be a complicated concept and a misconception that many business owners make. Having your bookkeeping up to date will allow you to make a few simple clicks to generate the profit and loss reports you need to prepare for the upcoming tax season.
When you prioritize your tasks and set up efficient processes, you can ensure a smoother, more enjoyable year-end, and you’ll be prepared and ready to go when it comes time to file your tax return. If you need help or still have questions about why there is a gap between your bank balance and your net income, let me know.
And, you know I’m going to ask…what’s at least one thing you will take away from this episode that will help your business succeed and grow your bottom line? If you want accountability or support, visit www.FinancialAdventure.com. You’ll find links to join our private Facebook community, connect with me on LinkedIn, and discover more free resources to help you reduce stress, boost productivity, and build a business and life you truly enjoy. I’ll see you there.
