# Learning Accounting through an example

Day six

Mr. Oberoi, went to the wholesale market, bought 350 worth of vegetables by taking 50 worth of vegetables on credit from the wholesale merchant. He then set out on his trip around the locality for selling vegetables.

Expenditure

= 350/

= Cost of Purchase

After buying the vegetables (stock/goods)

 CapitalWholesaler (Creditor) 32050 Stock/GoodsMrs. Vimla (Debtor) 35020

End of day six

Mr. Oberoi, counted the cash with him and found it to be 440. He also recollected that his customer Mrs. Vimla who was due to him the previous day paid the amount due.

Sale Proceeds relating to day six

= Total Cash Collected − Previous Dues included in the collection

= 440 − 20

= 420

Profit for the day should be assessed based on the sale proceeds relevant to the stock sold on the day and not based on the total cash collected

Profit for day six

= Sale proceeds for day six − Cost of purchase

= Income − Expenditure

= 420 − 350

= 70

Capital at the end of day six

= Capital at the beginning of day six + Profit for day six

= 320 + 70

= 390

 CapitalWholesaler (Creditor) 39050 Cash 440

# Receipts

• Amounts received towards income, past dues, advances, capital, etc., taken together
• Takings

# Incomes

• Sale proceeds, received and receivable together
• Revenue

## Incomes vs Receipts

Income and receipts are different entities. Income is only one of the many sources of receipts.

Receipts will be equal to income if the receipts consists of only sale proceeds from sale of goods/stock relevant to the current period.

## Income vs Profit

Income and profit are different entities. Income would be the source for earning profits. Profit is the surplus left after setting off Incomes against Expenses.

For day seven

Amount available for investment in goods or stock is 440.

The amount due to the wholesale vendor, for the credit accorded to him towards purchase of vegetables on day six, has not been paid yet. As such if that amount is repaid, then Mr. Oberoi would be left with 390 (= 440 − 50) for purchasing stock.

Day seven

Mr. Oberoi went to the wholesale market, paid 50 to the wholesale vendor towards the past dues and purchased vegetables worth 420 taking the needed amount as credit.

Cost of goods purchased (on day seven)

= 420

Payment towards purchases (of day seven)

= Total Payment − payment towards past due

= 440 − 50

= 390

Amount still owed to the wholesaler

= Cost of Purchase − payment towards current purchases

= 420 − 390

= 30

 CapitalWholesaler (Creditor) 39030 Stock/Goods 420

Expenditure on day seven

= 390

= Cost of Purchase

# Payments

• Amounts paid for purchase of goods, towards expenses, past dues, as advances, etc., taken together

# Expenses

• Amounts paid or payable for goods or services in business activities

## Expenses vs Payments

Expenses and payments are different entities. Expenditure is only one of the many reasons for payments.

Payments will be equal to expenses if the payment consists of only payments for goods or services relevant to the current period.

## Expenditure vs Loss

Expenditure and loss are different entities. Expenditure is only one of the sources for incurring losses. There would be loss on account of expenses if the incomes are not sufficient enough to recoup the expenses.

End of day Seven

Mr. Oberoi counted the cash with him at the end of the day and found it to be 350. He recollected that two customers Mrs. Sheela and Mr. Daniel were due to him to the extent of 20 and 25 respectively.

Total Sale proceeds/realisation (received and receivable)

= Collected in Cash + Due from Mrs. Sheel + Due from Mr. Daniel

= 350 + 20 + 25

= 395

Profit for day seven

= Collected in Cash + Due from Mrs. Sheel + Due from Mr. Daniel

= Total Income − Expenditure

= Total realisation − Cost of purchase

= 395 − 420

= − 25

Mr. Oberoi used up 25 as drawings at the end of day.

Cash remaining

= Sale realisation in Cash − Drawings

= 350 − 25

= 325

Capital at the end of day seven

= Capital at the start of day seven + Profit for the day − Drawings on day seven

= 390 + (−25) − 25

= 390 − 25 − 25

= 340

 CapitalWholesaler (Creditor) 34030 CashMrs. Sheela (Debtor)Mr. Daniel (Debtor) 3252025

## Note

Making the student aware of the terms like capital, drawings, income, expenditure, profit, loss, debtors, creditors etc., is the objective. Do not worry about how to get all the calculations right. They are provided to give an extra amount of clarity for the numbers.