Business basics: buying, selling, profit and udhaar
- Understand what a business is and the three main kinds of business
- Calculate profit or loss on goods sold, and see why unsold goods are stock
- Tell cash dealings from credit (udhaar) dealings and name debtors and creditors
- Keep the owner and the business separate: capital and drawings
Namaste dost! Before we open the first NCERT chapter, let us spend 25 minutes on the everyday ideas that every accounts chapter quietly assumes you know: what a business actually does, how profit is worked out, what "udhaar" means in accounts language, and why the shop's money and the shopkeeper's money must be kept apart. You already see all of this in your local market. Today we just give it proper names. No journal, no ledger yet, only common sense with a little arithmetic.
1. What is a business?
A business is any regular activity done to earn profit by providing goods or services to people. The important words are regular and profit. If you sell your old cycle once, that is not a business. If you buy cycles every week and sell them at a higher price, that is a business.
1.1 Three kinds of business
| Kind | What it does | Example |
|---|---|---|
| Trading | Buys ready goods and sells them without changing them | Kirana shop, mobile store, stationery shop |
| Manufacturing | Buys raw material, makes a new product, then sells it | Bakery making biscuits, a furniture workshop |
| Service | Sells work or skill, not goods | Tuition centre, beauty parlour, cyber café, courier |
In Class XI Accountancy, most examples are about a trading business, because it is the easiest to understand: buy goods, sell goods, pay expenses, and see what is left.
Sharma Stationery is a small shop near a school in Khurja. Mr. Sharma buys notebooks, pens and geometry boxes from a wholesaler in Delhi and sells them to students. He pays rent for the shop, a salary to his helper Raju and an electricity bill every month. He also gives a photocopy service. So his business is mostly trading, with a small service part. We will follow his shop throughout this lesson.
2. Buying and selling: the words you must know
- Goods: the things a business buys in order to sell them. For Mr. Sharma, notebooks are goods. His shop's counter is not goods, because he did not buy it to sell it.
- Purchases: goods bought for resale. (Buying a counter or a computer for the shop is not "purchases" in accounts; it is buying an asset.)
- Sales: goods sold to customers.
- Cost price (CP): the price at which goods are bought.
- Selling price (SP): the price at which goods are sold.
- Stock (also called inventory): goods lying unsold in the shop at a point of time.
In daily life people say "I purchased a fan". In accounts, Purchases means only goods bought for resale. A fan bought for the shop's own use is an asset (or an expense), never "Purchases". This small word causes many wrong answers in Chapter 3.
3. Profit and loss
Profit = Selling price − Cost price (when SP > CP)
Loss = Cost price − Selling price (when CP > SP)
Very important: profit is earned only on goods that are sold. Goods still lying in the shop have not earned anything yet. They are stock.
- Total cost of 100 notebooks = 100 × ₹30 = ₹3,000.
- Sales = 80 × ₹45 = ₹3,600.
- Cost of the 80 notebooks actually sold = 80 × ₹30 = ₹2,400.
- Profit = ₹3,600 − ₹2,400 = ₹1,200.
- Unsold notebooks = 20, valued at cost: 20 × ₹30 = ₹600.
Stock is valued at cost, not at selling price. The shop has not sold it yet, so it cannot count the profit on it. This is the conservatism idea you will meet in Chapter 2.
3.1 Gross profit and net profit
Selling goods is not the whole story. A shop also pays expenses: rent, salary, electricity, transport. So accountants talk about two profits:
- Gross profit = Sales − Cost of goods sold. (Profit from buying and selling alone.)
- Net profit = Gross profit − Other expenses. (What is really left for the owner.)
- Gross profit = ₹1,20,000 − ₹90,000 = ₹30,000.
- Total expenses = ₹8,000 + ₹6,000 + ₹2,000 = ₹16,000.
- Net profit = ₹30,000 − ₹16,000 = ₹14,000.
A mobile store buys 40 phone covers at ₹250 each and sells all of them at ₹310 each. What is the total profit (in ₹)?
A kirana shop's sales for May 2026 are ₹80,000 and the cost of goods sold is ₹60,000. Rent is ₹5,000 and wages are ₹4,000. Find the net profit (in ₹).
4. Revenue and expense, gain and loss
These four words appear on almost every page of NCERT, so let us settle them now.
| Word | Plain meaning | Sharma Stationery example |
|---|---|---|
| Revenue | Money earned from the normal, regular work of the business | Sales of notebooks, photocopy charges |
| Expense | Cost paid to run the business and earn revenue | Rent, salary, electricity |
| Gain | A profit from something that is not the normal work | Selling the old shop computer for more than its book value |
| Loss | Money lost with no benefit in return | Goods destroyed by water leakage, cash stolen |
Profit is not the same as cash. A shop can earn a profit and still have little cash, for example if many customers have not paid yet. That is exactly why we need the next idea.
5. Cash dealings and credit (udhaar) dealings
When payment happens at the same time as the deal, it is a cash transaction. In accounts, payment by UPI, card or cheque on the spot is also treated like cash (it goes through the bank, but no udhaar is created).
When payment is promised for later, it is a credit transaction, what everyone calls udhaar. Credit creates two very important people:
Debtor: a person who owes money to the business, because he bought goods or services on credit. (He has to pay us.)
Creditor: a person to whom the business owes money, because the business bought goods or services from him on credit. (We have to pay him.)
- Verma Coaching Centre has to pay Mr. Sharma ₹5,000. So Verma is a debtor.
- Mr. Sharma has to pay Gupta Wholesalers. So Gupta Wholesalers is a creditor.
- Amount still owed to Gupta = ₹20,000 − ₹12,000 = ₹8,000.
DE-btor = DEna hai (he has to give us). CRE-ditor gave us CREdit, so we have to pay him.
Priya bought a school bag worth ₹900 from Sharma Stationery and promised to pay next week. For the shop, what is Priya called: debtor or creditor?
6. The owner and the business are two different persons
This is the single most important idea for the whole subject. In accounts, the business is treated as separate from its owner, even if one person runs a small shop alone.
- Capital: the money or goods the owner puts into the business. For the business, capital is an amount it "owes" back to the owner.
- Drawings: money or goods the owner takes out of the business for personal or family use.
Mr. Sharma started the shop on 1 April 2026 with ₹2,00,000 from his savings. That ₹2,00,000 is the shop's capital. On 15 April he took ₹5,000 from the shop's cash to pay his son's school fees, and his wife took a box of pens home for the children. Both are drawings. They are not business expenses, because the business earned nothing from them.
Paying the owner's house rent or home electricity bill from the shop's money is drawings, not "Rent" or "Electricity" expense. Only the shop's rent and electricity are business expenses.
- An expense of the business
- A loss of the business
- Drawings
- Capital
7. What the business owns and owes (a first look)
At any moment, a business owns some things and owes some amounts.
- Assets = what the business owns and will benefit from: cash, bank balance, stock of goods, furniture, computer, and amounts debtors owe it.
- Liabilities = what the business owes to outsiders: creditors, bank loan, unpaid bills.
- Capital = what the business owes to its owner.
Everything the business owns was paid for either by outsiders or by the owner. So the two sides must always be equal. This is the famous accounting equation of Chapter 3: Assets = Liabilities + Capital. Keep it in mind; it is the backbone of the whole book.
- Notebooks lying unsold in the shop
- ₹8,000 payable to Gupta Wholesalers
- ₹5,000 receivable from Verma Coaching Centre
- The shop's computer
📌 Points to remember (Quick Revision)
- A business is a regular activity to earn profit: trading, manufacturing or service.
- Purchases = goods bought for resale only; assets bought for use are not purchases.
- Profit is earned only on goods sold; unsold goods are stock, valued at cost.
- Gross profit = Sales − Cost of goods sold; Net profit = Gross profit − Expenses.
- Debtor owes the business; creditor is owed by the business (udhaar creates both).
- Owner and business are separate: money brought in is capital, money taken for personal use is drawings.
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