A sole trader, Folake, extracted a trial balance at the end of the accounting period showi… — JAMB UTME

A sole trader, Folake, extracted a trial balance at the end of the accounting period showing a draft closing capital of $₦1,500,000$ . It was subsequently discovered that inventory costing $₦80,000$ (with a selling price of $₦100,000$ ) taken by Folake for private consumption had been completely omitted from the financial statements. What is the correct adjusted closing capital figure?

A
$₦1,420,000$
B
$₦1,400,000$
$₦1,500,000$ Answer
D
$₦1,580,000$

Answer

The corrected closing capital figure remains

₦1,500,000

Goods withdrawn by the proprietor for personal use must be debited to Drawings and credited to Purchases at cost price (

₦80,000

). Crediting purchases decreases cost of goods sold, raising net profit by

₦80,000

. When updating closing capital, the

₦80,000

increase in net profit is offset exactly by the

₦80,000

deduction for drawings. Thus, closing capital remains unchanged at

₦1,500,000

Step-by-Step Solution

Determine the double entry required for omitted goods withdrawn

Debit Drawings Account with

₦80,000

(cost price) and Credit Purchases Account with

���80,000

(cost price).

Goods taken for personal use must be valued at cost price, not selling price, under the business entity concept.

Assess the impact of the adjustment on Net Profit

Crediting Purchases reduces the Cost of Goods Sold by

₦80,000

, which increases Net Profit by

₦80,000

Lower cost of goods sold directly leads to an equivalent increase in net profit in the Trading and Profit & Loss Account.

Calculate the net effect on Closing Capital

Change in Capital =

+₦80,000\text{ (increase in Net Profit)} - ₦80,000\text{ (increase in Drawings)} = ₦0

Closing Capital formula is

\text{Opening Capital} + \text{Net Profit} - \text{Drawings}

. The equal increase in net profit and drawings cancels out entirely.

Key Concept

Dual impact of goods withdrawn on net profit and equity

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