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Learning Accounting through an example |
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End of day FiveOn counting the cash with him, Oberoi found it to be Rs. 330. He used Rs. 20 towards drawings and is left with Rs. 310 (330 - 20) as capital for the sixth day.In addition to this amount, he has Rs. 10 with Mrs. Vimla. Had that amount also been collected, he would have been left with an amount of Rs. 320 which would have been used by him for buying vegetables. Thus, we say that the total Capital employed by Mr. Oberoi in the business for the sixth day is Rs. 320 (Rs. 310 in the form of Cash and another Rs. 10 in the form of debtors). During Day SixOberoi, went to the wholesale market, bought vegetables with Rs. 350 by taking Rs. 40 worth of vegetables on credit from the wholesale merchant. Therefore his expenditure on buying vegetables, would be Rs. 350 (310 + 40). He then set out on his trip around the locality selling vegetables.End of day SixOberoi, counted the cash with him and found it to be Rs. 420. He also recollected that his customer Mrs. Vimla who was due to him the previous day repaid the amount due. In addition, two other customers, Mrs. Sheela and Mr. Daniel still owe him Rs. 15 each for the purchases made during the day.Now he worked out the profit for the day this way. He had Rs. 430 of which Rs. 10 was the previous day due and he is still to receive Rs. 30 (15 + 15). Therefore, his income for the day is Rs. 450 (430 - 10 + 30) and his profit would be Rs. 100 (450 - 350). Towards the end of the day, he used up Rs. 30 as drawings and thereby is left with a cash of Rs. 400 (430 - 30) which he could use for purchase of vegetables on the seventh day. Thus the total capital employed by Mr. Oberoi in the business for the seventh day would be Rs. 430 [Owned Capital - (Rs. 320 at the end of the sixth day + a profit of Rs. 100 for the sixth day - a drawings of Rs. 30 during the sixth day) + Loaned Capital - (Rs. 40 Credit taken from the Wholesaler at the beginning of the sixth day)]. This exists (at the end of the sixth day) in the form of Rs. 400 cash and Rs. 30 due from customers (debtors). • Incomes vs. Receipts » All Receipts do not form Income
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• Expenses vs. Payments » All Payments do not form Expenses
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Expenses and payments are to be understood as different entities. Payments are the amounts that we have paid out. They may relate to anything from payment on account of purchases, payments on account of capital, payments on account of previous dues etc.
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• Income » Profit
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Income is a term used to indicate the amount received or receivable that would be the source for earning profits. Profit is the surplus left after setting of Incomes against Expenses.
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During Day Seven
Oberoi, having a cash of Rs. 400 with him, went to the wholesale market, bought vegetables worth Rs. 360 and paid Rs. 400 to the wholesale merchant, thereby clearing his previous due of Rs. 40 also.His expenditure would be Rs. 360 only since the Rs. 40 he paid is towards the previous days dues. He then set out on his trip around the locality selling vegetables.
End of day Seven
Oberoi, counted the cash with him at the end of the day. It was Rs. 400. He also recollected that both the customers who were due to him the other day, i.e. Mrs. Sheela and Mr. Daniel (Rs. 15 each) paid up and another customer Mrs. Vimla has been given credit to the extent of Rs. 20 during the day.Now he worked out the profit for the day this way. He had Rs. 400 of which Rs. 30 belonged to the previous day and Rs. 20 is still due. Therefore, his income is Rs. 390 (400 - 30 + 20) and his profit would be Rs. 30 (390 - 360).
Towards the end of the day, he used up Rs. 25 as drawings and thereby is left with a cash of Rs. 375 (400 - 25) which he could use for purchase of vegetables on the eighth day.
Thus the total capital employed by Mr. Oberoi in the business for the eighth day would be Rs. 395 [Owned Capital - (Rs. 430 at the end of the seventh day + a profit of Rs. 30 for the seventh day - a drawings of Rs. 25 during the seventh day) - (loaned Capital repaid Rs. 40)]. This exists (at the end of the seventh day) in the form of Rs. 375 cash and Rs. 20 due from customers (debtors).
| Author Credit : The Edifier | ... Continued Page 4 |
