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are still in stock. A similar situation exists with sales. We have billed for $/£/€60,000 but been paid for only $/£/€48,000; the balance is owed by debtors. The bald figure at the end of the cash-flow projection showing High Note to be in the red to the tune of $/£/€4,908 seems to be missing some important facts.
    The difference between profit and cash
    Cash is immediate and takes account of nothing else. Profit, however, is a measurement of economic activity that considers other factors that can be assigned a value or cost. The accounting principle that governs profit is known as the ‘matching principle’, which means that income and expenditure are matched to the time period in which they occur. (Look back to earlier in the chapter where realization and accruals are explained.)
    So for High Note the profit and loss account for the first six months would be as shown in Table 1.6 .
    TABLE 1.6    Income statemen t /profit and loss account for High Note for the six months Apr–Sept
$/£/€
$/£/€
Sales

60,000
Less cost of goods to be sold

30,000
Gross profit

30,000
Less expenses:
Heat, electric, telephone, internet etc
6,000
Wages
6,000
Advertising
9,300
Total expenses

21,300
Profit before tax, interest and depreciation charges

8,700
    The structure of the income statemen t /profit and loss statement
    This account is set out in more detail for a business in order to make it more useful when it comes to understanding how a business is performing. For example, although the profit shown in our worked example is $/£/€8,700, in fact it would be rather lower. As money has been borrowed to finance cash flow there would be interest due, as there would be on the longer-term loan of $/£/€10,000.
    In practice we have four levels of profit:
Gross profit is the profit left after all costs related to making what you sell are deducted from income.
Operating profit is what’s left after you take away the operating expenses from the gross profit.
Profit before tax is what is left after deducting any financing costs.
Profit after tax is what is left for the owners to spend or reinvest in the business.
    For High Note this could look much as set out in Table 1.7 .
    TABLE 1.7    High Note extended profit and loss account
$/£/€
Sales
60,000
Less the cost of goods to be sold
30,000
Gross profit
30,000
Less operating expenses
21,300
Operating profit
8,700
Less interest on bank loan and overdraft
600
Profit before tax
8,100
Less tax
1,827
Profit after tax
6,723
    A more substantial business than High Note will have taken on a wide range of commitments. For example, as well as the owner’s money, there may be a long-term loan to be serviced (interest and capital repayments); parts of the workshop or offices may be sublet, generating ‘non-operating income’; and there will certainly be some depreciation expense to deduct. Like any accounting report, it should be prepared in the best form for the user, bearing in mind the requirements of the regulatory authorities. The elements to be included are:
sales (and any other revenues from operations);
cost of sales (or cost of goods sold);
gross profit – the difference between sales and cost of sales;
operating expenses – selling, administration, depreciation and other general costs;
operating profit – the difference between gross profit and operating expenses;
non-operating revenues – other revenues, including interest, rent, etc;
non-operating expenses – financial costs and other expenses not directly related to the running of the business;
profit before income tax;
provision for income tax;
net income (or profit or loss).
    Income statement/profit and loss spreadsheet
    There is an online spreadsheet at SCORE’s website ( www.score.org/resources/1-year-profit-loss-projection.xls ). Download in Excel format and you have a profit and loss account with 30 lines of expenses, the