The ₹19,000 Profit That Is Not in the Drawer
Reena runs 'Reena Collections', a readymade garment shop in Patiala. In the month of Baisakh she sold goods worth ₹1,20,000. Of this, ₹22,000 was sold on credit to two school-uniform buyers who promised to pay next month, and ₹28,000 came by UPI into her personal bank account, which she also uses for household spending. The rest was received as cash. She bought stock worth ₹78,000, but ₹12,000 of that bill is still unpaid to her Ludhiana supplier. Shop expenses for the month were ₹23,000 (rent, electricity, helper's salary). She withdrew ₹15,000 in cash for household expenses. She opened the month with ₹40,000 cash in the shop drawer and now finds only ₹6,000 there. Her neighbour tells her, 'Your shop is running at a loss.' Reena keeps no cash book and no vouchers; she only notes credit sales in a diary.
1. Calculate Reena's profit for the month and explain, with figures, why only ₹6,000 is left in the drawer. Is her neighbour right?
Read the worked answer
Profit is not the same thing as cash in the drawer.
Profit (accrual view): Sales ₹1,20,000 − Purchases ₹78,000 − Expenses ₹23,000 = ₹19,000 profit. The neighbour is wrong: the shop earned money.
Cash reconciliation:
| Item | ₹ |
|---|---|
| Opening cash | 40,000 |
| + Cash sales (1,20,000 − 22,000 credit − 28,000 UPI) | +70,000 |
| − Paid to supplier (78,000 − 12,000 still unpaid) | −66,000 |
| − Shop expenses | −23,000 |
| − Drawings | −15,000 |
| = Closing cash in drawer | 6,000 |
The ₹19,000 profit exists, but it is sitting in four other places: ₹22,000 is locked with credit customers (debtors); ₹28,000 went by UPI into her personal account, so business money is mixed with household money; ₹15,000 was withdrawn as drawings; and ₹12,000 stayed in her hands only because a supplier bill is still unpaid - that is a liability, not income.
Diagnosis: the shop is profitable but short of cash - a liquidity problem, not a loss. The real danger is that she spends the ₹28,000 at home and then cannot pay the ₹12,000 supplier bill, and that she has no written proof if a credit customer denies owing ₹22,000.
2. Recommend three bookkeeping changes Reena should start from the first day of next month, and state exactly what record each change produces.
Read the worked answer
- Open a single daily cash book (rough and fair). Every morning write the opening balance; every evening total cash receipts and cash payments, then write the closing balance and physically count the drawer. Record produced: a dated cash book whose closing balance must match the drawer. Any gap is found the same day, not after a month.
- Separate business money from household money. Open a business bank account and get a UPI QR code linked to it, not to her personal account. Fix her drawings at a stated amount (say ₹15,000) and record it as 'drawings', not as an expense. Record produced: bank statement plus a drawings column; the ₹28,000-type leakage disappears because every UPI receipt lands in the business account.
- Keep a voucher file and a debtor ledger. For every purchase and expense, keep the bill or a self-made voucher with date, amount and purpose. For every credit sale, write customer name, amount, date of sale, due date and amount received. Record produced: a numbered voucher file and a debtor list she can check weekly.
Why these three: they fix the three causes of her confusion - untracked cash, mixed personal and business receipts, and credit sales with no due date. None of them needs a computer or an accountant; a ₹40 notebook and a folder are enough to start.
3. A regular customer wants 30 days' credit on a ₹8,000 order. Reena's gross margin is 25% of selling price. What should she check, and what should she decide?
Read the worked answer
The arithmetic: 25% of ₹8,000 = ₹2,000 gross profit; the goods cost her ₹6,000 in cash today, which she will not recover for 30 days.
What she must check:
- Closing cash is ₹6,000 and she already owes the supplier ₹12,000 - so ₹6,000 locked in one customer's credit is more than her entire free cash.
- Has this customer paid on time before? If the two existing debtors (₹22,000) are already overdue, adding ₹8,000 makes a bad situation worse.
- Can the supplier wait 30 more days? If not, the credit sale creates a default.
Decision rule: a sale is only safe to give on credit if the cash it locks up can be spared without missing a payment that falls due in the same period. Here it cannot.
Practical answer: do not refuse the customer outright - restructure the terms. Offer (a) 25% advance now and the balance in 15 days, or (b) full payment with a small cash discount, or (c) 30 days' credit only after she collects at least part of the ₹22,000 outstanding and confirms the supplier can wait. The lesson: a profitable order can still break a small business if it is financed from money needed for wages and suppliers.