A little Skye Terrier named Bobby is the pet of a Scottish farmer and his wife but the dog loves an old shepherd hired on the farm called Auld Jock. When money grows scarce on the farm, Auld Jock is fired. He travels to Edinburgh, and Bobby follows him. Auld Jock dies in poverty in an inn and is buried in Greyfriar's Kirkyard. Bobby returns to Auld Jock's grave every night to sleep.

Against the wishes of his wife, the graveyard caretaker James Brown tries to shoo Bobby away, but Bobby always finds his way back to the grave. Bobby endears himself to all, especially the neighborhood children. Brown and a restaurant owner, Mr. Traill, compete for the affections of the dog. Brown alleges Traill should pay Bobby's license fee, which he refuses on principle, not being Bobby's master.

Mr. Traill is summoned to the court for a hearing, where he pleads not guilty. Mr. Brown is also present in the court, but he tells Mr. Traill he is sick, and can't get out of bed. Mr. Traill is told to come back the next day, with Bobby as well.

Bobby's fate rests with the Lord Provost of Edinburgh and, without a license and someone to take responsibility for Bobby, he may be destroyed. The children of Edinburgh contribute their pennies for Bobby's license. Bobby is declared a Freeman of the City and adopted by the populace of Edinburgh.