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Question

Difficulty: MediumGoods Withdrawn by Owner for Personal Use

Chief Okon withdrew goods costing ₦18,000 from his supermarket for private family consumption. The retail selling price of these goods was ₦24,000. Which of the following correctly describes the double-entry adjustment required to record this transaction in the final accounts?

  1. Debit Drawings account with ₦18,000 and credit Purchases account with ₦18,000Answer
  2. B
    Debit Drawings account with ₦24,000 and credit Sales account with ₦24,000
  3. C
    Debit Purchases account with ₦18,000 and credit Drawings account with ₦18,000
  4. D
    Debit Capital account with ₦24,000 and credit Purchases account with ₦24,000

Answer

Debit Drawings account with ₦18,000 and credit Purchases account with ₦18,000
The correct option correctly applies the cost principle to drawings of stock: goods withdrawn by the proprietor for personal consumption are always valued at cost price (₦18,000). The transaction is posted by debiting the Drawings account to record the owner's personal withdrawal and crediting the Purchases account to deduct the cost of these goods from total purchases in the Trading Account.

Step-by-Step Solution

1
Identify the relevant valuation rule for goods taken by the owner.
Goods taken by the owner for personal use must always be recorded at cost price (₦18,000), not at selling price (₦24,000).
Accounting rules dictate that a proprietor cannot make a profit out of themselves; therefore, profit cannot be recognized on goods taken for private use.
2
Determine the dual effect on ledger accounts.
The personal withdrawal increases the owner's Drawings (debit) and reduces total available goods purchased for resale in Purchases (credit).
Debiting Drawings records the withdrawal of business assets, while crediting Purchases reduces the cost of goods available for sale in the Trading Account.

Key Concept

Goods Withdrawn by Owner for Personal Use
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Topics

Goods Withdrawn by Owner for Personal Use

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