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Difficulty: HardTreatment of Owner's Capital, Drawings, and Goods Withdrawn

Ade, a sole proprietor, reported an initial net profit of ₦420,000₦420,000 for the financial year. An audit revealed that goods taken by Ade for private use costing ₦60,000₦60,000 (with a retail selling price of ₦75,000₦75,000) were mistakenly recorded in the Sales Journal at selling price, instead of being treated as drawings of goods at cost price. What is the correct net profit for the year in Naira?

Answer: 405000 ₦

Answer

The correct net profit for the year is ₦405,000₦405,000.
When goods are taken by the proprietor for personal use, the correct accounting entry is to debit Drawings Account and credit Purchases Account at cost price (₦60,000₦60,000). Because the goods were mistakenly recorded as sales at selling price (₦75,000₦75,000), sales revenue was overstated by ₦75,000₦75,000 and purchases were not reduced by ₦60,000₦60,000. Reversing the incorrect sale reduces profit by ₦75,000₦75,000, while adjusting purchases increases profit by ₦60,000₦60,000. Net adjustment =−75,000+60,000=−15,000= -75,000 + 60,000 = -15,000. Correct net profit =420,000−15,000=405,000= 420,000 - 15,000 = 405,000.

Step-by-Step Solution

1
Deduct the erroneously credited selling price from reported sales
Net profit is reduced by ₦75,000₦75,000 (₦420,000−₦75,000=₦345,000₦420,000 - ₦75,000 = ₦345,000)
Goods withdrawn for personal use must not be recognized as sales revenue.
2
Credit the Purchases account with the cost price of goods withdrawn
Cost of goods sold decreases by ₦60,000₦60,000, increasing net profit to ₦405,000₦405,000
Goods withdrawn by the owner reduce total purchases at cost price.

Key Concept

Goods withdrawn by the proprietor for personal use must be debited to Drawings Account and credited to Purchases Account at COST price.
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Topics

Treatment of Owner's Capital, Drawings, and Goods Withdrawn

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