Debit and credit in cash flow forecast

How to work out debit and credit in cash flow forecast

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Debit and credit in cash flow forecast

How debit and credit works in a cash flow forecast

You may wondering if it matters about accounting debit and credit in a cash flow forecast. The answer to this question is it depends. The ‘depends’ is whether or not you include a projected balance sheet and profit and loss with your cash flow forecast. Let’s take a look…

Debit and credit in cash flow forecast: Debit and credit in a cash flow forecast is only important if your reports include a forecast profit and loss and a projected balance sheet in addition to the cash flow forecast report. But if your reports only include a cash flow forecast you don’t need to worry about debit and credit.

Having said that, it’s good practice to include as a minimum a projected balance sheet with your cash flow forecast. A projected balance sheet acts as a check to make sure your figures balance and all make sense.

What is debit and credit in simple words?

Debits and credits are equal but opposite entries in your bookkeeping system. Using the traditional T-Accounts principle, a debit is an entry made on the left side of the account, whereas a credit is an entry on the right side.

A debit entries increase assets or expense accounts, or decrease liabilities, revenue or equity accounts. Whereas a credits increase liabilities, revenue or equity accounts, but decrease asset or expense accounts.

With this explained, let’s now take a look at how debit and credit works in relation to cash flow forecasts.

Examples of debits and credits

I thought it useful to run through a few examples of debits and credits and how these are represented in the accounts or on a balance sheet.

Are fixed assets like plant and equipment a debit or credit?

Fixed assets like plant and equipment on the balance sheet are a debit, as they are assets. A debit to a fixed asset will increase the balance of the asset. Whereas a credit will reduce the balance.

However, the depreciation entries on the balance sheet are a credit. Which means that a debit will reduce depreciation, whereas a credit would increase it.

Is cash a debit or credit?

Cash or bank balances are a debit and an asset on the balance sheet. A debit to cash or bank will increase the balance of cash or bank balance. Whereas a credit will reduce the balance.

Is stock a debit or credit?

Stock or inventory is a debit on the balance sheet as it’s an asset. A debit to stock or inventory will increase the balance of stock. Whereas a credit will reduce the balance.

Are debtors a debit or credit?

Debtors which includes trade debtors and other debtors on the balance sheet are a debit. A debit to debtors will increase the balance of the debtor. Whereas a credit will reduce the balance.

Are liabilities a debit or credit?

Liabilities like trade creditors, amounts owed in taxes, loans, hire purchase, factoring balances and other creditors are a credit as they all liabilities. A debit to any of these liabilities will decrease the liability on the balance sheet. Whereas a credit will increase the balance on each one.

Are equity accounts a debit or credit?

Equity accounts including share capital, share premium and the profit and loss on the balance sheet are mostly a credit. Although the profit and loss on a balance sheet can be a debit if the the business has a suffered an accumulated loss.

A debit to any of these equity accounts will decrease the equity account on the balance sheet. Whereas a credit will increase the balance on each one. However, if the profit and loss is a debit because there are losses, a debit will increase the balance on the profit and loss, whereas a credit will reduce the accumulated loss balance.

Is revenue and sales on the profit and loss a debit or a credit?

Revenues or sales on the profit and loss are credits. A debit to revenue or sales will decrease the revenue or sale, whereas a credit will increase the amount of sales or revenue.

Are expenses and overheads on the profit and loss a debit or credit?

Expenses and overheads on the profit and loss are debits. A debit to expenses and overheads will increase the expense or overhead, whereas a credit will decrease the amount of expense or overhead.

Debit and credit in cash flow forecast and how it works

Now armed with the knowledge about what debit and credit means in simple terms. Plus having reviewed the various balance sheet and profit and loss items. Let’s take a look at debit and credit in cash flow forecasts.

If you’re simply preparing a cash flow forecast without other reports, like a forecast profit and loss or a projected balance sheet, then you don’t really need to worry too much about debits and credits.

However, if you want your cash flow forecasts to be reliable, I would always recommend when you prepare cash flow forecasts for business planning purposes or to raise bank finance or other funding, you are better advised to include both a projected balance sheet and a forecast income statement or profit and loss.

It is when you prepare these additional reports when debits and credits become more important to understand. However, if you are struggling with this concept, you might be better off investing in cash flow forecasting software instead. With cash flow forecast software, the debuts and credits are dealt with for you automatically.

However, if you’d prefer to persevere with preparing your own cash flow forecasts using Excel or other spreadsheet software, then you need to follow the rules explained above.

You also need to be aware of the difference between the amounts you include on the cash flow report vs the profit and loss report. That is; sales and expenses on the profit and loss are included net of VAT (or Sales Tax and GST), whereas on the cash flow forecast these are included gross of VAT, Sales Tax or GST.

Cash flow template

A cash flow template will already be set up with the basics for cash flow forecasting, including taking care of debits and credits so you don’t need to worry.

A good cash flow template should allow the user to simply enter their business numbers, whilst the template does the rest resulting in accurate projections.

Why is a cash flow forecast important?

A cash flow forecast is important to predict what’s going to happen to cash flows in the future.

Cash flow projections are a key management tool that forecast if the business has sufficient funds to survive, but if it’s running out of cash, the cash flow forecast can be used to obtain new finance to plug the gaps.

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