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Difficulty: MediumTreatment of Owner's Capital, Drawings, and Goods Withdrawn

Chief Emeka, a sole trader, withdrew goods costing ₦50,000₦50,000 (selling price ₦65,000₦65,000) from his shop for personal family use. This transaction was omitted from the financial records when calculating an initial draft Cost of Goods Sold of ₦480,000₦480,000. What is the correct Cost of Goods Sold after adjusting for the goods withdrawn?

  1. ₦430,000₦430,000Answer
  2. B
    ₦530,000₦530,000
  3. C
    ₦415,000₦415,000
  4. D
    ₦545,000₦545,000

Answer

₦430,000₦430,000
Goods taken by a sole proprietor for personal consumption are recorded at cost price (₦50,000₦50,000) by debiting Drawings and crediting Purchases. Crediting Purchases reduces the net purchases figure in the Trading Account, which directly lowers the Cost of Goods Sold from ₦480,000₦480,000 to ₦430,000₦430,000.

Step-by-Step Solution

1
Determine the correct valuation basis for goods withdrawn by the owner.
The goods withdrawn must be valued at cost price (₦50,000₦50,000), not at selling price (₦65,000₦65,000).
The owner cannot make a profit on goods taken for personal consumption, so the withdrawal is recorded at cost.
2
Identify the accounting adjustment for goods withdrawn on the Trading Account.
The cost of goods withdrawn is credited to the Purchases Account, which reduces total purchases.
Goods taken for domestic use reduce the stock available for sale to customers.
3
Calculate the adjusted Cost of Goods Sold.
Adjusted Cost of Goods Sold = Initial Cost of Goods Sold - Cost of Goods Withdrawn = ₦480,000−₦50,000=₦430,000₦480,000 - ₦50,000 = ₦430,000.
Deducting the reduced purchase amount from the draft Cost of Goods Sold gives the true cost of goods sold to customers.

Key Concept

Accounting treatment of goods withdrawn by the owner for personal use at cost price
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Topics

Treatment of Owner's Capital, Drawings, and Goods Withdrawn

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