Reconstructing the Books of a Tailoring Unit
Meena runs a three-machine tailoring unit in a district town with two employees. She wants a ₹3 lakh loan to buy an overlock machine and fabric. Her records are a diary, a bank passbook and a UPI statement. Last month: cash sales were ₹60,000; UPI business receipts were ₹50,000; credit sales were ₹30,000, of which she collected ₹10,000 in cash. She paid cash for fabric ₹30,000 and bought ₹30,000 more on 30-day supplier credit, unpaid at month-end. Opening fabric stock was ₹15,000; closing stock is ₹25,000. Cash expenses were rent ₹8,000, wages ₹18,000, electricity ₹3,000 and transport ₹4,000. She withdrew ₹15,000 for household use. One customer's ₹18,000 cheque bounced and is unlikely to be recovered. The cash box should have held ₹12,000 from an opening cash balance of ₹20,000 but has ₹7,500. Meena uses one UPI ID for both shop and family payments.
1. Prepare a simple monthly profit statement and cash reconciliation. Show gross profit, net profit and the cash shortage. State how you treat drawings, credit sales, the bounced cheque and the unpaid supplier bill.
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Profit statement: Sales = cash ₹60,000 + UPI ₹50,000 + credit ₹30,000 = ₹1,40,000. Cost of goods sold = opening stock ₹15,000 + purchases (cash ₹30,000 + credit ₹30,000) − closing stock ₹25,000 = ₹50,000. Gross profit = ₹90,000. Expenses = rent ₹8,000 + wages ₹18,000 + electricity ₹3,000 + transport ₹4,000 = ₹33,000. Less bad debt ₹18,000. Net profit = ₹39,000.
Drawings of ₹15,000 are not an expense; they reduce owner's equity. The unpaid supplier bill of ₹30,000 is a payable, not a cash payment. Cash reconciliation: opening cash ₹20,000 + cash sales ₹60,000 + collection ₹10,000 − cash purchases ₹30,000 − expenses ₹33,000 − drawings ₹15,000 = ₹12,000 expected. Actual cash is ₹7,500. Shortage = ₹4,500. The bounced cheque is a receivable and bad debt, not cash received.
2. Identify the main bookkeeping and control weaknesses and design a practical one-page monthly record she can keep.
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Weaknesses: one UPI ID for business and family; no invoice book; cash not counted daily; no receivables ledger; no stock card; drawings not separated; the ₹4,500 shortage is not investigated.
Practical design: one long cash book with date, particulars, receipt, payment, mode (cash/UPI/bank), category, voucher number and running balance. Keep separate columns for sales, purchases, wages, rent, drawings and loan. Keep a duplicate invoice book, a stock card for fabric and finished goods, and a receivables page with due dates. Count the cash box daily and have the count signed. Use a separate UPI/bank account for business, or at least tag business receipts. Reconcile the bank weekly. Treat the ₹4,500 as a suspense item until explained, not as a business expense.
3. Explain to Meena why profit is not the same as cash, and how these records improve her loan application.
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Profit is earned when a sale is made, even if cash has not arrived; cash is what is actually in the box or bank. Meena's profit of ₹39,000 is after credit sales and bad debt, but her cash is reduced by drawings, supplier payments and the missing ₹4,500.
A lender will look at verified turnover, gross margin, stock, receivables, drawings and repayment capacity. Clean records show that the business generates a surplus, that the ₹3 lakh loan can be repaid, and that the owner separates business from household money. They also reduce the risk of the loan being used for consumption and make stock and receivables usable as security. She should bring 6–12 months of records and a written stock and receivables statement.