Textbook - Business Finance and Arithmetic, Entrepreneurship, Class 11 | Entrepreneurship Class 11 - Commerce PDF Download

 Page 1


 160 
UNIT 6 
Business Finance and Arithmetic 
Learning Objectives 
After reading this unit the student will be able to: 
 Understand the importance and technique of preparing a Cash Register. 
 Understand the meaning and concept of the term Cash Inflow and Cash Outflow. 
 Understand the concept of COST and its components- Start-up, Fixed and Variable Costs. 
 Explain the terms- Unit Cost, Unit of Sale, Unit Price 
 Calculate Per Unit Cost of a single product. 
 Explain the concept of Profit, its calculation and the impact of direct and indirect expenses on the 
profit. 
 Understand the importance and preparation of Income Statement. 
 Appreciate the importance of Cash Flow Projections in the smooth flow of finances in the business. 
 Understand the concept of Break Even Analysis. 
 Understand the meaning and importance of Taxes. 
„Accounting is all about counting - adding sales and subtracting costs. So arithmetical ability is crucial 
for running a business.?- Anonymous 
Most people freeze in on their tracks the moment they hear the word ?accounting?. That is 
because accounting has been made into a ?complex subject?. However, we are not trying to 
create accountants but entrepreneurs and successful entrepreneurs need to understand the basic 
accounting concepts in a simple manner. For that, they need to have very simple and basic 
arithmetic abilities – addition, subtraction, multiplication, division and basic concept of 
percentage. This will help the entrepreneurs understand the fundamentals of business – 
numerically. Anything beyond this would be the accountant‘s job. 
Cash Register 
“Never spend your money before you have earned it”. - Thomas Jefferson 
The importance of cash (money) in business is similar to that of blood in the human or any 
other living being. In business, all transactions are made by paying or receiving money (except 
in barter trade) or equivalent of cash such as cheques. Sometimes when the businesses have 
trust in people, cash does not cross hands immediately but instead they are given what is called 
?credit‘ or ?loan? with an understanding that money will be paid at some later date and loan 
considered paid.  
Page 2


 160 
UNIT 6 
Business Finance and Arithmetic 
Learning Objectives 
After reading this unit the student will be able to: 
 Understand the importance and technique of preparing a Cash Register. 
 Understand the meaning and concept of the term Cash Inflow and Cash Outflow. 
 Understand the concept of COST and its components- Start-up, Fixed and Variable Costs. 
 Explain the terms- Unit Cost, Unit of Sale, Unit Price 
 Calculate Per Unit Cost of a single product. 
 Explain the concept of Profit, its calculation and the impact of direct and indirect expenses on the 
profit. 
 Understand the importance and preparation of Income Statement. 
 Appreciate the importance of Cash Flow Projections in the smooth flow of finances in the business. 
 Understand the concept of Break Even Analysis. 
 Understand the meaning and importance of Taxes. 
„Accounting is all about counting - adding sales and subtracting costs. So arithmetical ability is crucial 
for running a business.?- Anonymous 
Most people freeze in on their tracks the moment they hear the word ?accounting?. That is 
because accounting has been made into a ?complex subject?. However, we are not trying to 
create accountants but entrepreneurs and successful entrepreneurs need to understand the basic 
accounting concepts in a simple manner. For that, they need to have very simple and basic 
arithmetic abilities – addition, subtraction, multiplication, division and basic concept of 
percentage. This will help the entrepreneurs understand the fundamentals of business – 
numerically. Anything beyond this would be the accountant‘s job. 
Cash Register 
“Never spend your money before you have earned it”. - Thomas Jefferson 
The importance of cash (money) in business is similar to that of blood in the human or any 
other living being. In business, all transactions are made by paying or receiving money (except 
in barter trade) or equivalent of cash such as cheques. Sometimes when the businesses have 
trust in people, cash does not cross hands immediately but instead they are given what is called 
?credit‘ or ?loan? with an understanding that money will be paid at some later date and loan 
considered paid.  
 161 
All cash transactions are to be recorded in a book called a cash book or cash register. In 
accounting language, the cash book is a book of original entry. The term entry simply means 
making a note of the cash received or given. 
Maintaining a cash book or register is very essential for every business. Without the entries 
from the cash Book, no further analysis of expenses, costs, revenues, profit etc. can be made. 
Hence maintaining a cash book is very critical for the success of a business. 
 
Writing a cash book in business is similar to maintaining household expense by a home maker 
or noting how pocket money is spent by a student. Examples are:  
 List and value all grocery items purchased. 
 Amounts of all the bills paid such as, electricity, telephone, water, rent etc. 
 Money spent on purchasing vegetables and fruits. 
 Money spent on cinema tickets. 
 Recharging of a mobile phone.  
 Money spent on a bus ticket. 
Inflow and Outflow: 
We can call receipts of money as inflow, and payments made as outflow 
In the case of a housewife, money coming from salary is inflow and money being spent on 
various items as listed above is outflow. For a student pocket money received from parents is 
inflow and various outflow items are listed. 
Now let us understand some of the ways by which money comes in to the business and reasons 
for spending the money by the business.  
Inflow: 
Following is a list of some of the ways in which money comes into the business: 
 Owners’ Equity: own money invested in the business. 
Page 3


 160 
UNIT 6 
Business Finance and Arithmetic 
Learning Objectives 
After reading this unit the student will be able to: 
 Understand the importance and technique of preparing a Cash Register. 
 Understand the meaning and concept of the term Cash Inflow and Cash Outflow. 
 Understand the concept of COST and its components- Start-up, Fixed and Variable Costs. 
 Explain the terms- Unit Cost, Unit of Sale, Unit Price 
 Calculate Per Unit Cost of a single product. 
 Explain the concept of Profit, its calculation and the impact of direct and indirect expenses on the 
profit. 
 Understand the importance and preparation of Income Statement. 
 Appreciate the importance of Cash Flow Projections in the smooth flow of finances in the business. 
 Understand the concept of Break Even Analysis. 
 Understand the meaning and importance of Taxes. 
„Accounting is all about counting - adding sales and subtracting costs. So arithmetical ability is crucial 
for running a business.?- Anonymous 
Most people freeze in on their tracks the moment they hear the word ?accounting?. That is 
because accounting has been made into a ?complex subject?. However, we are not trying to 
create accountants but entrepreneurs and successful entrepreneurs need to understand the basic 
accounting concepts in a simple manner. For that, they need to have very simple and basic 
arithmetic abilities – addition, subtraction, multiplication, division and basic concept of 
percentage. This will help the entrepreneurs understand the fundamentals of business – 
numerically. Anything beyond this would be the accountant‘s job. 
Cash Register 
“Never spend your money before you have earned it”. - Thomas Jefferson 
The importance of cash (money) in business is similar to that of blood in the human or any 
other living being. In business, all transactions are made by paying or receiving money (except 
in barter trade) or equivalent of cash such as cheques. Sometimes when the businesses have 
trust in people, cash does not cross hands immediately but instead they are given what is called 
?credit‘ or ?loan? with an understanding that money will be paid at some later date and loan 
considered paid.  
 161 
All cash transactions are to be recorded in a book called a cash book or cash register. In 
accounting language, the cash book is a book of original entry. The term entry simply means 
making a note of the cash received or given. 
Maintaining a cash book or register is very essential for every business. Without the entries 
from the cash Book, no further analysis of expenses, costs, revenues, profit etc. can be made. 
Hence maintaining a cash book is very critical for the success of a business. 
 
Writing a cash book in business is similar to maintaining household expense by a home maker 
or noting how pocket money is spent by a student. Examples are:  
 List and value all grocery items purchased. 
 Amounts of all the bills paid such as, electricity, telephone, water, rent etc. 
 Money spent on purchasing vegetables and fruits. 
 Money spent on cinema tickets. 
 Recharging of a mobile phone.  
 Money spent on a bus ticket. 
Inflow and Outflow: 
We can call receipts of money as inflow, and payments made as outflow 
In the case of a housewife, money coming from salary is inflow and money being spent on 
various items as listed above is outflow. For a student pocket money received from parents is 
inflow and various outflow items are listed. 
Now let us understand some of the ways by which money comes in to the business and reasons 
for spending the money by the business.  
Inflow: 
Following is a list of some of the ways in which money comes into the business: 
 Owners’ Equity: own money invested in the business. 
 162 
 
  
 
 
 
 
 Loan Received: money borrowed from friends, family, relatives, bank etc. 
 Sales Receipts: money coming in by selling your products or service. 
 Interest Earned: money coming in the form of interest on the deposits made in the bank. 
 Rent Received : Money coming in by renting out building or room. 
 Sale of Assets: Money coming in by selling surplus property like furniture, machinery, old 
car etc. 
 Claims Received: Money coming in the form of insurance claims like accident claims, fire 
claims, maturity of insurance policies, etc. 
 Government Subsidy Received: Money coming in the form of grant paid by the 
government. It is a form of financial assistance paid to an individual starting  a business. 
 Sale of Scrap: Money coming in by selling scrap and waste material, selling rejects etc. 
This list is not exhaustive. Think of some more ways in which money comes in to the business 
and enhance this list. 
Note: 
Please remember that profit is not to be considered as inflow. Nobody gives money as ?profit?. 
Profit is being generated in the business. Hence profit is not to be included as ?inflow?. 
Outflow: 
Following is a list of some of the ways in which money goes out of the business 
 
 
Page 4


 160 
UNIT 6 
Business Finance and Arithmetic 
Learning Objectives 
After reading this unit the student will be able to: 
 Understand the importance and technique of preparing a Cash Register. 
 Understand the meaning and concept of the term Cash Inflow and Cash Outflow. 
 Understand the concept of COST and its components- Start-up, Fixed and Variable Costs. 
 Explain the terms- Unit Cost, Unit of Sale, Unit Price 
 Calculate Per Unit Cost of a single product. 
 Explain the concept of Profit, its calculation and the impact of direct and indirect expenses on the 
profit. 
 Understand the importance and preparation of Income Statement. 
 Appreciate the importance of Cash Flow Projections in the smooth flow of finances in the business. 
 Understand the concept of Break Even Analysis. 
 Understand the meaning and importance of Taxes. 
„Accounting is all about counting - adding sales and subtracting costs. So arithmetical ability is crucial 
for running a business.?- Anonymous 
Most people freeze in on their tracks the moment they hear the word ?accounting?. That is 
because accounting has been made into a ?complex subject?. However, we are not trying to 
create accountants but entrepreneurs and successful entrepreneurs need to understand the basic 
accounting concepts in a simple manner. For that, they need to have very simple and basic 
arithmetic abilities – addition, subtraction, multiplication, division and basic concept of 
percentage. This will help the entrepreneurs understand the fundamentals of business – 
numerically. Anything beyond this would be the accountant‘s job. 
Cash Register 
“Never spend your money before you have earned it”. - Thomas Jefferson 
The importance of cash (money) in business is similar to that of blood in the human or any 
other living being. In business, all transactions are made by paying or receiving money (except 
in barter trade) or equivalent of cash such as cheques. Sometimes when the businesses have 
trust in people, cash does not cross hands immediately but instead they are given what is called 
?credit‘ or ?loan? with an understanding that money will be paid at some later date and loan 
considered paid.  
 161 
All cash transactions are to be recorded in a book called a cash book or cash register. In 
accounting language, the cash book is a book of original entry. The term entry simply means 
making a note of the cash received or given. 
Maintaining a cash book or register is very essential for every business. Without the entries 
from the cash Book, no further analysis of expenses, costs, revenues, profit etc. can be made. 
Hence maintaining a cash book is very critical for the success of a business. 
 
Writing a cash book in business is similar to maintaining household expense by a home maker 
or noting how pocket money is spent by a student. Examples are:  
 List and value all grocery items purchased. 
 Amounts of all the bills paid such as, electricity, telephone, water, rent etc. 
 Money spent on purchasing vegetables and fruits. 
 Money spent on cinema tickets. 
 Recharging of a mobile phone.  
 Money spent on a bus ticket. 
Inflow and Outflow: 
We can call receipts of money as inflow, and payments made as outflow 
In the case of a housewife, money coming from salary is inflow and money being spent on 
various items as listed above is outflow. For a student pocket money received from parents is 
inflow and various outflow items are listed. 
Now let us understand some of the ways by which money comes in to the business and reasons 
for spending the money by the business.  
Inflow: 
Following is a list of some of the ways in which money comes into the business: 
 Owners’ Equity: own money invested in the business. 
 162 
 
  
 
 
 
 
 Loan Received: money borrowed from friends, family, relatives, bank etc. 
 Sales Receipts: money coming in by selling your products or service. 
 Interest Earned: money coming in the form of interest on the deposits made in the bank. 
 Rent Received : Money coming in by renting out building or room. 
 Sale of Assets: Money coming in by selling surplus property like furniture, machinery, old 
car etc. 
 Claims Received: Money coming in the form of insurance claims like accident claims, fire 
claims, maturity of insurance policies, etc. 
 Government Subsidy Received: Money coming in the form of grant paid by the 
government. It is a form of financial assistance paid to an individual starting  a business. 
 Sale of Scrap: Money coming in by selling scrap and waste material, selling rejects etc. 
This list is not exhaustive. Think of some more ways in which money comes in to the business 
and enhance this list. 
Note: 
Please remember that profit is not to be considered as inflow. Nobody gives money as ?profit?. 
Profit is being generated in the business. Hence profit is not to be included as ?inflow?. 
Outflow: 
Following is a list of some of the ways in which money goes out of the business 
 
 
 163 
 Land: Purchasing land to start business. 
 Building: Constructing a building or purchasing a building to start business. 
 Plant and Machinery: Investing money in Plant and Machinery to start business. 
 Furniture and Fixtures: Purchasing furniture and fixtures. 
 Interior Decoration: Investing money in hiring an interior decorator.  
 Tools: Purchasing tools for the business which will be utilized in the business. 
 Computers: Purchasing computers. 
 Raw Material: Buying of raw materials.  
 Packing Material: Money required to buy packing material for products. 
 Transportation: Purchasing a vehicle to be used for transporting raw materials, transporting 
your products to the customer‘s premises.  
 Salary and Bonus: The money paid to employees. 
 Employee Benefits: The perks given to employees like travel allowance, medical benefits 
etc. 
 Incentives: Payment of incentives to employees based on their performance. 
 Advertising: Money spent on publicizing the products through newspaper, television, 
pamphlets, brochures, public hoardings, etc. 
 Rent at Premises: Money being spent on paying the rent for the premises used for the 
business. 
 Interest on Loan: Borrowed money on which interest is to be paid. 
 Insurance Premium: Money paid as premium to the insurance company for covering 
various risks. 
 Travel: Money spent on travelling for the owners and the employees. 
 Sales Commission: Money given to the employees or agents as commission on sales. 
These are some of the ways in which money gets spent out. Think of some more and enhance 
this list. 
Note:  
When items are used with longer life in business (furniture, machinery etc), a part of its original 
value is computed as the cost for a given period – say a month, year etc. This is known as 
depreciation. However, money is not paid for ?depreciation?. So depreciation is not a cash 
outflow. It is a non-cash expenditure. 
Recording Cash Inflows and Outflows 
Now let‘s take a look at the format in which a cash book or register is written for only cash 
transactions. This is a simplified version (compared to what an accountant would use for cash 
book) in which we have 6 columns as shown below: 
 
Page 5


 160 
UNIT 6 
Business Finance and Arithmetic 
Learning Objectives 
After reading this unit the student will be able to: 
 Understand the importance and technique of preparing a Cash Register. 
 Understand the meaning and concept of the term Cash Inflow and Cash Outflow. 
 Understand the concept of COST and its components- Start-up, Fixed and Variable Costs. 
 Explain the terms- Unit Cost, Unit of Sale, Unit Price 
 Calculate Per Unit Cost of a single product. 
 Explain the concept of Profit, its calculation and the impact of direct and indirect expenses on the 
profit. 
 Understand the importance and preparation of Income Statement. 
 Appreciate the importance of Cash Flow Projections in the smooth flow of finances in the business. 
 Understand the concept of Break Even Analysis. 
 Understand the meaning and importance of Taxes. 
„Accounting is all about counting - adding sales and subtracting costs. So arithmetical ability is crucial 
for running a business.?- Anonymous 
Most people freeze in on their tracks the moment they hear the word ?accounting?. That is 
because accounting has been made into a ?complex subject?. However, we are not trying to 
create accountants but entrepreneurs and successful entrepreneurs need to understand the basic 
accounting concepts in a simple manner. For that, they need to have very simple and basic 
arithmetic abilities – addition, subtraction, multiplication, division and basic concept of 
percentage. This will help the entrepreneurs understand the fundamentals of business – 
numerically. Anything beyond this would be the accountant‘s job. 
Cash Register 
“Never spend your money before you have earned it”. - Thomas Jefferson 
The importance of cash (money) in business is similar to that of blood in the human or any 
other living being. In business, all transactions are made by paying or receiving money (except 
in barter trade) or equivalent of cash such as cheques. Sometimes when the businesses have 
trust in people, cash does not cross hands immediately but instead they are given what is called 
?credit‘ or ?loan? with an understanding that money will be paid at some later date and loan 
considered paid.  
 161 
All cash transactions are to be recorded in a book called a cash book or cash register. In 
accounting language, the cash book is a book of original entry. The term entry simply means 
making a note of the cash received or given. 
Maintaining a cash book or register is very essential for every business. Without the entries 
from the cash Book, no further analysis of expenses, costs, revenues, profit etc. can be made. 
Hence maintaining a cash book is very critical for the success of a business. 
 
Writing a cash book in business is similar to maintaining household expense by a home maker 
or noting how pocket money is spent by a student. Examples are:  
 List and value all grocery items purchased. 
 Amounts of all the bills paid such as, electricity, telephone, water, rent etc. 
 Money spent on purchasing vegetables and fruits. 
 Money spent on cinema tickets. 
 Recharging of a mobile phone.  
 Money spent on a bus ticket. 
Inflow and Outflow: 
We can call receipts of money as inflow, and payments made as outflow 
In the case of a housewife, money coming from salary is inflow and money being spent on 
various items as listed above is outflow. For a student pocket money received from parents is 
inflow and various outflow items are listed. 
Now let us understand some of the ways by which money comes in to the business and reasons 
for spending the money by the business.  
Inflow: 
Following is a list of some of the ways in which money comes into the business: 
 Owners’ Equity: own money invested in the business. 
 162 
 
  
 
 
 
 
 Loan Received: money borrowed from friends, family, relatives, bank etc. 
 Sales Receipts: money coming in by selling your products or service. 
 Interest Earned: money coming in the form of interest on the deposits made in the bank. 
 Rent Received : Money coming in by renting out building or room. 
 Sale of Assets: Money coming in by selling surplus property like furniture, machinery, old 
car etc. 
 Claims Received: Money coming in the form of insurance claims like accident claims, fire 
claims, maturity of insurance policies, etc. 
 Government Subsidy Received: Money coming in the form of grant paid by the 
government. It is a form of financial assistance paid to an individual starting  a business. 
 Sale of Scrap: Money coming in by selling scrap and waste material, selling rejects etc. 
This list is not exhaustive. Think of some more ways in which money comes in to the business 
and enhance this list. 
Note: 
Please remember that profit is not to be considered as inflow. Nobody gives money as ?profit?. 
Profit is being generated in the business. Hence profit is not to be included as ?inflow?. 
Outflow: 
Following is a list of some of the ways in which money goes out of the business 
 
 
 163 
 Land: Purchasing land to start business. 
 Building: Constructing a building or purchasing a building to start business. 
 Plant and Machinery: Investing money in Plant and Machinery to start business. 
 Furniture and Fixtures: Purchasing furniture and fixtures. 
 Interior Decoration: Investing money in hiring an interior decorator.  
 Tools: Purchasing tools for the business which will be utilized in the business. 
 Computers: Purchasing computers. 
 Raw Material: Buying of raw materials.  
 Packing Material: Money required to buy packing material for products. 
 Transportation: Purchasing a vehicle to be used for transporting raw materials, transporting 
your products to the customer‘s premises.  
 Salary and Bonus: The money paid to employees. 
 Employee Benefits: The perks given to employees like travel allowance, medical benefits 
etc. 
 Incentives: Payment of incentives to employees based on their performance. 
 Advertising: Money spent on publicizing the products through newspaper, television, 
pamphlets, brochures, public hoardings, etc. 
 Rent at Premises: Money being spent on paying the rent for the premises used for the 
business. 
 Interest on Loan: Borrowed money on which interest is to be paid. 
 Insurance Premium: Money paid as premium to the insurance company for covering 
various risks. 
 Travel: Money spent on travelling for the owners and the employees. 
 Sales Commission: Money given to the employees or agents as commission on sales. 
These are some of the ways in which money gets spent out. Think of some more and enhance 
this list. 
Note:  
When items are used with longer life in business (furniture, machinery etc), a part of its original 
value is computed as the cost for a given period – say a month, year etc. This is known as 
depreciation. However, money is not paid for ?depreciation?. So depreciation is not a cash 
outflow. It is a non-cash expenditure. 
Recording Cash Inflows and Outflows 
Now let‘s take a look at the format in which a cash book or register is written for only cash 
transactions. This is a simplified version (compared to what an accountant would use for cash 
book) in which we have 6 columns as shown below: 
 
 164 
Cash Register format for Cash only 
Date Description Ref No.(Voucher/ Bill) Cash 
Received 
(in Rs.) 
Cash 
Paid 
(in Rs.) 
Cash 
Balance 
(in Rs.) 
1 2 3 4 5 6 
      
      
 In the above format, the first column is the date on which either received cash or paid cash 
is entered. 
 The second column is the description in which the details for which either received cash or 
paid cash is entered. For example: monthly tea expenses paid or purchase of furniture, etc. 
 The third column is where the bill or voucher details are entered. 
 The fourth column is where the amount of cash received is entered. 
 The fifth column is the where the amount of cash paid is entered. 
 The sixth and last column is where the left over balance is entered. 
Let us consider the following example: 
 Opening balance of Rs 40,000/- 
 Spent Rs 10,000/- for purchasing furniture, then in the fifth column enter Rs. 10,000/- and 
in the sixth column enter Rs. 30,000/- (Rs. 40,000 – Rs. 10,000). 
 Sold products on the next day for Rs. 5,000/-. Then in the fourth column enter  
Rs. 5,000/- and in the sixth column, enter Rs. 35,000/- (Rs. 30,000 + Rs. 5,000). 
Exercise 1 – Cash Transactions Only 
Ratan Singh is an owner of a shop in a three-star hotel at Ranthambore. He sells T-shirts and 
mementos to the tourists at that shop. He also takes a stall on rent at crowded places on a daily 
basis. Details of daily transactions for the month of July are given below. Let us suppose that he 
started his business with an opening balance of Rs. 30,000/- 
(i) On July 01, to start his business, he buys some furniture and basic supplies that cost him 
Rs. 15000/- 
(ii) On July 2, he buys 3 dozens of T-shirts at Rs. 1200/- per dozen. 
(iii) On July 6, he decides to sell T-shirts at the temple area on the forthcoming Sundays. And 
for that he paid an advance rent of Rs. 100/- per day. Apart from that he spent Rs. 200/- 
for the banners and Rs. 50/-for handbills. 
(iv) On July 7, he sold all the T-shirts at Rs. 200/- per piece. 
(v) On July 10, he again purchased   five dozens of T-shirts at Rs. 1200/- per dozen.