For a layman, the net profit shown in the financial statements would be the actual profits for the business; however it is necessary to understand the difference between the Book Profit as shown in the financial statements and the Cash Profit.
A Cash Profit is the actual surplus generated by the business. Necessary adjustments are made to this Cash profit which ultimately gives us the Book Profit. A book profit comprises adjustments related to depreciation and other non-cash items. These non-cash items are provisions, prepaid assets, outstanding expenses, outstanding income etc. On the other hand, Cash profit is nothing but a net difference between the Cash receipts and the Cash payments during the year. When depreciation and other adjustments are made to the Book Profit, the result that we get is Cash profit. The financial statements are prepared under the mercantile system, hence many a times the incomes that are yet not received in cash are recognised as incomes and added to the book profit based on the accrual system. Similarly many a times, the expenses which are not still paid are recognised as expense which caused the book profit to change. Accordingly the accrual based accounting is a major reason for the difference between the Cash profit and Book Profit. When the books of accounts are maintained on Cash basis, then the Book profit and Cash profit of a business comes to the same value. In Financial world, the stakeholders not only want that the company must generate Book Profit but they want that a company must generate Cash profits also. Cash profits serve as indicators of the financial health of the Company.
Hence there is a major difference in Cash Profit and Book Profit and it requires understanding on the part of the readers to understand their difference.