Sale Purchase, Profit & Loss

Having understood the basic ideas underlying a business, we can now look at the math connecting these ideas and transactions.

Let us understand it through a simple example.

1. Ram is a merchant in a vegetable market. He buys vegetables daily from the local wholesale market and sells it in the retail market. For the purpose of simplicity, let us assume that he deals only in tomatoes.

2. Early in the morning, he takes his van, goes to the wholesale market and buys 200 kgs of tomatoes at a price of Rs 10 per kg. He fills the van with Rs 200 worth of diesel. He also pays Rs 50 to a laborer to load the tomatoes on the van.

3. At the city vegetable market he unloads all the tomatoes and arranges them on the shop counter. For this he has an assistant to whom he pays a daily wage of Rs 40.

4. While arranging the tomatoes he finds that 5 kg of tomatoes has got completely squashed due to incorrect stacking.

5. During the day he manages to sell 150 kgs of tomatoes at Rs 15 per kg. He also manages to sell the damaged tomatoes at a price of Rs 2 per kg.

6. Somewhere in the evening he realizes that a lot of tomatoes are still to be sold. If he does not sell them the same day, they will go bad. Hence he announces a discount of 20% on the price of tomatoes and manages to sell all of them.

With the above information, let us see the details of his business and whether he made a profit or loss at the end of the day.

1. His total sales income for the day was

   1. 150 Kgs sold at Rs 15 per kg = Rs 2,250

   2. 5 kgs of damaged tomatoes sold at Rs 2 per kg = Rs 10

   3. Income from sale of balance tomatoes at a discount of 20%. This needs to be computed now.

2. What was the price at which sold the rest of the tomatoes?

   1. There was a discount of 20% on the price of R 15/kg. This means the new price was 20% less than Rs 15. The amount of discount was 20% of Rs 15 = 20/100*15 = Rs 3. Hence the discounted price was Rs 15 – Rs 3 = Rs 12 /kg.

3. What was the quantity of tomatoes sold at this price?

   1. The total quantity purchased was 200 kgs.

   2. Quantity sold at Rs 15 was 150 kgs

   3. The quantity which was damaged was 5 kgs.

   4. Hence the balance tomatoes were 200 – 150 -5 = 45 kgs

4. Hence the income from tomatoes sold at discounted price is

   1. 45kgs sold at Rs 12 per kg = Rs 540.

   2. Discount is given as a fraction (usually expressed as a percentage) on the sale price.

   3. It could be given for many reasons. The essential idea is that the price which is announced to the public remains same and the discount can be varied or even withdrawn as per the plans of the businessman.

5. Hence the total sale income for the day was (referring to Para 1)

   1. Total Sale Income = Rs 2,250+ Rs 10 + Rs 540 = Rs 2,800

6. Now let us work out his total expenses for the day

   1. Cost of buying 200 kgs of tomatoes at Rs 10 per kg = Rs 2000

   2. Wages paid to labor at wholesale market – Rs 50

   3. Daily salary to Shop Assistant – Rs 40

   4. Cost of diesel for van – Rs 200

   5. Total expense – Rs 2000 + 50 + 40 + 200 = Rs 2,290

   6. Any expense which is incurred for either conducting or promoting a business can be taken as business expenses.

7. Hence at the end of the day he has made a profit of Rs 2800 – 2290 = Rs 510.

8. We can also calculate his profit percentage on the total income for the day which is

   1. 510/ 2800 * 100 = 18.20%

   2. On different days, Ram’s sale income & the profit may be different. But the profit % will give a profit measure which he can use to compare on various days.

Some Points to Note

1. This is a very simplified picture of an actual business scenario. The main purpose is to enable primary school students to understand one of the topics in business.

2. It is essential that every business to be profitable. Only a profitable business will be self-sustaining.

3. We can think of many other expenses even the business described above would need to occur.

   1. A rent may have to be paid for the shop

   2. The van may need maintenance & repair

   3. The owner of the shop may take a salary from the profits.

4. If the expenses on a day or over a period of time are more than the sales income, then the business incurs a loss. The reasons could be several.

   1. There could be a rise in the price of tomatoes because of a shortfall in the rains. In such a case people may buy less of tomatoes or shift to a cheaper vegetable.

   2. There could be an accident to the van which may destroy most of the tomatoes carried in it.

   3. A loss could be due to a reduction in the sale income or an increase in the expenses.

   4. The loss = expenses – sale income. The loss as a percentage of the sale income can also be calculated for comparison purposes.