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A poor unemployed
person (we shall call him Oberoi) thought of making his livelihood by
selling vegetables going around houses in a locality. He could only garner
a small amount say Rs. 200/- with which he could start the business.
• Business
In a very simple
sense, business implies something that is carried on with a motive to earn
profit/income. Profit motive is inherent in business. Not that every
business generates profits, but the motive behind every act/transaction in
a business would be making profit.
• Capital
The amounts and
other resources with which a business is started or carried on is called
Capital.
The amounts and other resources employed in the business
which belong to the owner/owners of the business are together called owned
capital.
The amounts and other resources employed in business which
are borrowed by the owner/owners of the business from outside persons or
organisations are together called loaned capital.
Oberoi's Capital = Rs. 200/-
Oberoi's daily routine
He used to go to
the wholesale market early in the morning to buy fresh vegetables which are
generally available during that time. He bought vegetables from wholesale
vendors. He then roamed around a locality selling the vegetables to various
households. To make a profit he sold the vegetables at a price arrived at
by adding a certain amount over his purchase price.
• Profit and Loss
Profit = Selling
price — Cost price and
Loss = Cost price — Selling price
Profit is a
numerical figure. It can either be positive (when there is a profit), negative
(when there is a loss) or zero when there is neither profit nor loss. A
loss is also expressed as a negative profit.
In a similar way,
loss is also a numerical figure. It can either be positive (when there is a
loss), negative (when there is a profit) or zero when there is neither
profit nor loss. A profit can also be as a negative loss, but is seldom
done.
At the beginning and during the course of Day One
Oberoi, went to
the wholesale market, bought vegetables with the Rs. 200 (his capital) and
then set out on his trip around the locality selling vegetables. Since the
Rs. 200 he invested enabled him to buy a small quantity of vegetables, he
could remember the prices at which he bought the various varieties. He was
selling his stock by adding certain amount over the cost at which he
purchased them.
• Price and Value
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Value = Price ×
Quantity ⇒ Price = Value ÷
Quantity
⇒ Value of a unit
quantity is the price.
Eg: The values of 5 kg goods is Rs. 80 ⇒ The price of goods is Rs. 16/kg
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End of day One
By evening,
Oberoi, sold all the vegetables he purchased in the morning. He counted the
cash with him at the end of the day. It was Rs. 280. Where did the extra
Rs. 80 (280 − 200) come from? It is on account of the profit he made by
selling vegetables.
Beginning of day two
What is the
capital Oberoi has? Since he has Rs. 280 at the end of day one, he can use
all that for purchasing vegetables on day two. Therefore his capital is Rs.
280.
What happened to his capital? Why? How?
His capital has
increased from day one today two by Rs. 80. The reason for this increase is
the profit he made on day one.
From this we learn
one of the fundamental understandings in accounting/business.
• Profit increases Capital
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As we make
profits our capital increases.
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During the course of Day Two
Oberoi, went to
the wholesale market, bought vegetables with the Rs. 280 (his capital for
day two) and then set out on his trip around the locality selling
vegetables. Even on day two he was selling his stock by adding certain
amount over the cost at which he purchased them.
Towards the end of
the day he noticed that there was certain stock left over which if he is
unable to sell would get spoilt and he would get nothing out of it.
Therefore he sold them by reducing the price. This price at which he sold
the vegetables was far less than the price at which he bought them.
End of day Two
Oberoi, counted
the cash with him at the end of the day. It was Rs. 260. Why a shortage,
what happened to his Rs. 280/-. The shortage of Rs. 20/- (280 - 260) is on
account of the loss he incurred in selling the vegetables.
Beginning of day three
What is the
capital Oberoi has? Since he has Rs. 260 at the end of day two, he can use
all that for purchasing vegetables on day three. Therefore his capital is Rs.
260.
What happened to his capital? Why? How?
His capital has
decreased from day two today three. The reason for this decrease is the
loss he incurred on day two.
From this we learn
one another fundamental understanding in accounting/business.
• Losses decrease Capital
As we incur losses
our capital decreases.
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