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Difficulty: MediumTreatment of Owner's Capital, Drawings, and Goods Withdrawn

Bisi, a sole trader, extracted the following financial records at the end of her accounting period: Opening Capital of ₦950,000₦950,000, Net Profit of ₦270,000₦270,000, Cash Drawings of ₦60,000₦60,000, and Goods taken for personal consumption costing ₦40,000₦40,000 with a selling price of ₦55,000₦55,000. What is the closing capital balance to be reported in her Statement of Financial Position?

  1. ₦1,120,000₦1,120,000Answer
  2. B
    ₦1,320,000₦1,320,000
  3. C
    ₦1,105,000₦1,105,000
  4. D
    ₦1,160,000₦1,160,000

Answer

The closing capital balance is ₦1,120,000₦1,120,000.
Goods taken by a sole proprietor for personal use must be recorded at cost price (₦40,000₦40,000), not selling price. Total drawings combine cash drawings (₦60,000₦60,000) and goods drawings (₦40,000₦40,000), giving ₦100,000₦100,000. Applying the accounting equation: Closing Capital = Opening Capital (₦950,000₦950,000) + Net Profit (₦270,000₦270,000) - Total Drawings (₦100,000₦100,000) results in ₦1,120,000₦1,120,000.

Step-by-Step Solution

1
Determine total drawings by valuing goods withdrawn at cost price.
Total Drawings = Cash Drawings (₦60,000₦60,000) + Goods Withdrawn at Cost (₦40,000₦40,000) = ₦100,000₦100,000. Selling price is ignored because goods withdrawn reduce inventory at cost.
According to accounting standards, goods withdrawn by the proprietor for personal use must be recorded at cost price, not selling price, to remove the profit element.
2
Apply the sole trader capital equation to find closing capital.
Closing Capital = Opening Capital + Net Profit - Total Drawings
Net profit increases the owner's stake in the business, while any withdrawal of cash or goods reduces equity.
3
Substitute the known figures into the formula.
Closing Capital = ₦950,000+₦270,000−₦100,000=₦1,120,000₦950,000 + ₦270,000 - ₦100,000 = ₦1,120,000.
This yields the accurate net equity position at the end of the period.

Key Concept

Accounting treatment of cash and goods drawings at cost price in determining closing capital
Estimated Time:1m 30s
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Topics

Treatment of Owner's Capital, Drawings, and Goods Withdrawn

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