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Oberoi, went to the wholesale market, bought vegetables with 260 and then set
out on his trip around the locality for selling vegetables.
Expenditure
= 260/
= Cost of Purchase
By the end of the day, Mr. Oberoi, sold all the vegetables he purchased in the
morning. He counted the cash with him and found it to be 300. This 300 would
be his sales realisation.
Profit
= Income − Expenditure
= 300 − 260
= 40
= 260 + 40
= 300
Capital 300 Cash 300
He then recollected that in the afternoon, he used 40 from the sale proceeds for
buying some personal items to take home. The sale proceeds of 300 he had was
after using up this amount.
Drawings
The amounts relating to the business, used by the owners of business for
personal purposes.
Had he not used that 40 for his personal purposes, he would have had 340 with
him. This 340 is the actual sale realisation, of which he has used up 40 for own
purposes. Thus we can say that his income for the day is 340.
= Income − Expenditure
= 340 − 260
= 80
Based on the actual profit made for the day, his capital at the end of the day
should have been 340 and not 300.
= 260 + 80
= 340
We will be able to account for the lesser capital if we take the amount of
drawings also into consideration
= 260 + 80 − 40
= 300
Additional Capital
Drawings represents capital withdrawn (taken away from business). The action
that is opposite in nature to this is bringing in capital.
Day four
Mr. Oberoi went to the wholesale market and selected the vegetables he wanted
to buy. The total amount he had to pay for the purchase amounted to 350.
Because he only had 300, he asked the wholesale vendor for a credit of 50 with
a promise to repay by that evening or next day morning. Since he had been
purchasing stock from him for the past few days, the wholesale vendor did not
mind extending him the credit.
Expenditure
= 350/
= Cost of Purchase
Mr. Oberoi has paid 300 and has to pay up the remainig 50, whether or not he
sells the vegetables. The value of goods he purchased is 350 and his expenditure
or cost of purchase is 350.
We say that he has purchased stock using 300 from his own sources and 50
from outside sources. The 50 credit he obtained for the stock is a loan to be
repaid later on.
Creditors
The persons or organisations to whom/which the business organisation owes
money or anything of value.
lender
debtee
debtor
Owned Capital
Amounts and other resources invested in the business that belongs to the
owners of the business.
It includes the capital that has been brought in as well as the capital that has
been accumulated through profits.
Loaned Capital
Amounts and other resources invested in the business by borrowing from
outsiders is called loaned capital.
Loaned capital also forms capital for the business. It is also called debts
of or debts owed by the business.
The business is reponsible for the borrowed amounts. In most cases the
owner(s) are also collectively repsonsible for the debt.
Thus on day four, after buying vegetables from the wholesale market,
Investment in stock/goods
= 350
Since the goods/stock he sold for a total of 400 had been purchased for 350, it
would be appropriate to consider the profit to be 50.
= 300 + 50
= 350
Using the sale proceeds, Mr. Oberoi cleared the debt of 50 to the wholesale
vendor and used up 20 as drawings.
= Captial at the start of day four + Profit for day four − Drawings during day
four
= 300 + 50 − 20
= 330
Cash remaining
= 330
Day five
Mr. Oberoi, went to the wholesale market, bought vegetables with 330 he had
and then set out on his trip around the locality for selling vegetables.
Expenditure
= 330/
= Cost of Purchase
Mr. Oberoi, counted the cash with him at the end of the day and found it to be
330. There is no surplus or shortage, which implies that he has made neither
profit nor loss.
Had he collected that amount from her, he would have had 350 in hand which is
the actual sale realisation.
= 330 + 20
= 350
His profit or loss on day five should be assessed based on this actual sale
proceeds and not just the cash collected.
= 350 − 330
= 20
= 330 + 20
= 350
Debtors
The persons or organisations who/which owe money or anything of value to
the business organisation.
borrower
creditor
Eg : Mrs. Vimla who owes an amount to Mr. Oberoi is his debtor or to be more
specific a debtor to/of Mr. Oberoi's business.
From the sale proceeds at the end of the day, Mr. Oberoi used up 30 as
drawings.
= Captial at the start of day five + Profit for day five − Drawings during day five
= 330 + 20 − 30
= 320
Cash remaining
= 330 − 30
= 300
Mr. Oberoi would be able to invest only the amount available with him for buying
his vegetable stock. All of his capital is not available to him in cash. Some of it is
struck up in Debtors which only when collected in cash can be used as
investment.
Creditors increase loaned capital. This will result in an increase in the total capital
employed. This makes greater investment available for being used in business
activities like buying stock or for purchases.
Debtors block up some of the total capital from being used as investment. They
can be understood as an avenue where some of the total capital has been
invested. This will result in a decrease in the investment available for being used
in business activities like buying stock or for purchases.