A Little Princess opens with seven-year-old Sara Crewe and her father, Captain Crewe, arriving at Miss Minchin's boarding school for girls in London. Captain Crewe is very wealthy and states that Sara is a destined for a lavish, comfortable future. Despite being pampered all her life in India, Sara herself is very intelligent, polite, and creative. Headmistress Miss Minchin is secretly jealous and dislikes Sara for her cleverness, but openly praises and flatters her because of her father's wealth. Before departing for India, Captain Crewe purchases Sara an elegant wardrobe and a doll whom Sara adores and names "Emily." Sara's friendliness and love for pretending and storytelling makes her popular with most of the school's students. They soon begin regarding her as a princess, which she embraces. Sara befriends Ermengarde, the school dunce; Lottie, a spoiled four-year-old student; and Becky, the scullery maid.

A few years later, Sara receives word from Captain Crewe that he and a childhood friend have become partners in a scheme to gain control of a diamond mine which could potentially multiply his wealth enormously. Miss Minchin later treats Sara to a very luxurious eleventh birthday party per Captain Crewe's request. Captain Crewe's lawyer arrives unexpectedly and tells Miss Minchin that Captain Crewe has died of jungle fever and his partner has gone missing. He then adds that business troubles that rendered him completely poor, leaving Sara an orphaned beggar. Enraged that she will never be reimbursed for all the services and goods spent on Sara since receiving the last check, Miss Minchin seizes all of Sara's possessions except for an outgrown black frock and Emily. Miss Minchin then tells Sara that she will live in the attic next to Becky and work as a servant in order to continue living in the school.