Income, Expenditure, Receipts, Payments

Learning Accounting through an example

Beginning of day Six :

Capital at the end of day five

= Capital at the beginning of day five + Profit on day five - Drawings on day five
= 330 + 20 - 20
= 330

Capital available for Investment

= Realisation in cash on day five - Drawings on day five
= 330 - 20
= 310

During day six : Oberoi, went to the wholesale market, bought vegetables worth 350 by taking 40 worth of vegetables on credit from the wholesale merchant. He then set out on his trip around the locality selling vegetables.

Investment for day six

= Cash available + Creditors
= 310 + 40
= 350

End of day Six : Oberoi, counted the cash with him and found it to be 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 15 each for the purchases made during the day.

Realisation relating to day six

= Realisation on day six + Debtors on day six s- Cash received from previous Debtors
= 420 + (15 + 15) - 20
= 430

Profit on day six

= Realisation relating to day six - Investment for day six
= 430 - 350
= 80

On day six, he used up 30 as drawings.

Capital at the end of day six

= Capital at the beginning of day six + Profit on day six - Drawings on day six
= 330 + 80 - 30
= 380

Capital available for Investment

= Realisation in cash on day six - Drawings on day six
= 420 - 30
= 390

Incomes vs Receipts - All Receipts do not form Income

Income and receipts are to be understood as different entities. Receipts are the amounts that we have received. They may relate to anything from receipts on account of sales, receipts on account of capital, receipts on account of previous dues etc.

Income for now can be understood as receipts from sale of goods or stock. Distinction has to be made between receipts towards income relatable to current investment and receipts towards past dues (from debtors) for assessing profits.

We will learn about this in greater detail in the topic final accounting.

Expenses vs Payments - All Payments do not form Expenses

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.

Expenses for now can be understood as payments for purchase of goods or stock. Distinction has to be made between payments for expenses relatable to current investment and payments for past dues (to creditors) for assessing profits.

We will learn about this in greater detail in the topic final accounting.

Income, Profit

Income is a term used to indicate the amount received or receivable. Income would be the source for earning profits. Profit is the surplus left after setting off Incomes against Expenses.

Beginning of day seven : Mr. Oberoi went to the wholesale market, repaid the wholesale vender the amount (40) he was due to him on account of the credit purchase on day six and purchased vegetables with the rest.

Capital available for Investment

= Capital available for Investment at the end of day six - repayment of due to wholesale merchant
= 390 - 40
= 350

During day seven : Oberoi, purchased vegetables counted the cash with him and found it to be 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 15 each for the purchases made during the day.

Mr. Oberoi purchased vegetables with the investment he had i.e. 350. 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 400. He also recollected that both the customers who were due to him the other day, i.e. Mrs. Sheela and Mr. Daniel ( 15 each) paid up and another customer Mrs. Vimla has been given credit to the extent of 10 during the day.

Total realisation relatable to day seven

= Cash Collected - Previous days dues collected + Current days due uncollected
= 400 - (15 + 15) + 10
= 380

Profit for day seven

= Realisation relatable to day seven - Investment for day seven
= 380 - 350
= 30

Mr. Oberoi used up 25 as drawings.

Capital at the end of day seven

= Capital at the beginning of day seven + Profit on day seven - Drawings on day seven
= 380 + 30 - 25
= 385

Capital available for Investment

= Realisation on day seven - Drawings on day seven
= 400 - 25
= 375

For now making you aware of and understanding the terms like capital, drawings, income, expenditure, debtors, creditors etc., would suffice. Do not worry about how to get all those calculations right. They are provided to give an extra amount of clarity for the numbers.