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Difficulty: MediumGoods Withdrawn by Owner for Personal Use

Emeka, a building materials dealer, took items costing ₦120,000 from his business inventory for personal construction at his private residence. The retail selling price of these goods was ₦160,000. Which of the following journal entries correctly records this transaction?

  1. Debit Drawings account ₦120,000; Credit Purchases account ₦120,000Answer
  2. B
    Debit Drawings account ₦160,000; Credit Sales account ₦160,000
  3. C
    Debit Drawings account ₦120,000; Credit Sales account ₦120,000
  4. D
    Debit Purchases account ₦120,000; Credit Capital account ₦120,000

Answer

Debit Drawings account ₦120,000; Credit Purchases account ₦120,000
When an owner withdraws goods for personal use, the transaction must be recorded at cost price (₦120,000). The double entry is to debit Drawings (to reflect owner's withdrawal) and credit Purchases (to reduce total cost of goods purchased for resale).

Step-by-Step Solution

1
Determine the correct valuation basis for inventory withdrawn by the owner.
Goods taken for personal consumption must be recorded at COST PRICE (₦120,000), not at selling price.
The business entity concept dictates that a proprietor cannot make a profit out of withdrawing goods from their own business.
2
Identify the ledger account to debit for personal withdrawals.
Debit Drawings account with ₦120,000.
Drawings represent assets taken out of the business by the owner, reducing equity.
3
Identify the ledger account to credit to adjust inventory available for sale.
Credit Purchases account with ₦120,000.
The goods were originally recorded in Purchases when bought; crediting Purchases removes the cost of goods no longer available for resale.

Key Concept

Accounting adjustment for goods withdrawn by owner for personal use
Estimated Time:1m 0s
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Topics

Goods Withdrawn by Owner for Personal Use

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