Before You Spend the Profit, Make Sure You Earned It
How two bookkeeping mistakes can overstate monthly profit by 50%—even when the bank account reconciles perfectly.
The report says you made $45,000 last month. You’ve been putting off hiring someone, and that number makes the decision feel easier.
Except $15,000 of that profit doesn’t belong there.
This is a hypothetical example, but the arithmetic is straightforward. Two transactions were recorded incorrectly. Nothing went missing from the bank account, and every deposit and withdrawal matched the statement.
The books looked finished. The profit was wrong.
The deposit that looked like a good month
Suppose a business starts the month with $40,000 in the bank and no debt.
It collects $60,000 from customers for work earned that month and receives a $20,000 business loan. It pays $29,000 in operating expenses and makes a $6,000 loan payment: $5,000 toward principal and $1,000 in interest.
For simplicity, there are no other transactions or accounting adjustments.
Now someone records the loan deposit as sales. The full loan payment goes into expenses.
Here’s the difference:
Correctly recorded
Revenue: $60,000
Operating expenses: $29,000
Interest expense: $1,000
Profit before income taxes: $30,000
Incorrectly recorded
Revenue, including the loan: $80,000
Operating expenses: $29,000
Entire loan payment recorded as expense: $6,000
Reported profit before income taxes: $45,000
Borrowing $20,000 did not create revenue. Paying back $5,000 of principal did not create an expense; it reduced the debt.
Together, the errors add $15,000 to reported profit—a 50% overstatement.
But the bank balance matches
It does. Both versions end with $85,000:
$40,000 + $60,000 + $20,000 − $29,000 − $6,000 = $85,000.
That is what makes the mistake easy to overlook.
Bank reconciliation checks recorded bank transactions against the statement. It helps establish that the cash activity agrees. It does not, by itself, establish that each transaction was assigned to the right account.
The bank confirms that $20,000 arrived. It cannot tell you whether your bookkeeping treated that money as a loan or a sale.
Even the incorrect balance sheet can balance: the remaining $15,000 debt is missing, while equity is overstated by $15,000.
There is no unexplained difference demanding attention. You have to look beyond the bank.
A bookkeeping mistake becomes a spending decision
The owner reviewing that $45,000 profit might see room for a hire, a larger lease, or another recurring commitment.
The business may have enough cash to make the first payment. The more important question is whether its earnings support the commitment.
Borrowed money can fund a business. It cannot demonstrate that the business is earning enough to sustain its spending.
The error changes the answer to a question owners ask every month: “How well are we doing?”
It could also follow you into your tax return
If these errors reach the return without correction, the business could report $15,000 more income than it should—and potentially pay tax it does not owe.
Ordinary loan proceeds generally aren’t taxable income when there is an obligation to repay. Principal repayments aren’t deductible expenses. The IRS discusses repayable debt and canceled debt and distinguishes loan repayment from deductible expenses.
The tax effect depends on the business structure, applicable rates, and other adjustments. A 50% profit overstatement does not automatically mean a 50% tax overpayment.
Your tax preparer may catch the problem. That still leaves the decisions you made before tax season.
Ask one question beyond “Does it reconcile?”
Try this:
“What supports the numbers I’m about to make decisions with?”
For this example, that means checking the loan balance against the lender’s records, separating principal from interest, and investigating the apparent jump in sales.
You don’t need to redo the bookkeeping yourself. You need a bookkeeper who can explain the results and show you what remains unresolved.
If your reports don’t add up to what you know about your business, our bookkeeping cleanup checklist is a useful starting point.
SnapBooks also offers a free cleanup review, with a clear quote before cleanup work begins and no obligation to proceed. For ongoing support, learn about our monthly bookkeeping services.
Before you commit the money, make sure the profit you’re relying on was actually earned.
