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Question

Difficulty: EasyTreatment of Owner's Capital, Drawings, and Goods Withdrawn

When a sole proprietor withdraws goods from the business for private use, which of the following accounting entries is required to record the transaction?

  1. Debit Drawings account and credit Purchases accountAnswer
  2. B
    Debit Drawings account and credit Sales account
  3. C
    Debit Capital account and credit Sales account
  4. D
    Debit Purchases account and credit Drawings account

Answer

Debit Drawings account and credit Purchases account
When a sole proprietor withdraws goods for personal use, the cost of goods available for resale is reduced and the owner's drawings increase. The correct double entry is to debit the Drawings account and credit the Purchases account at cost price.

Step-by-Step Solution

1
Identify the account to be debited for the owner's personal withdrawal
Debit Drawings account
Under the business entity concept, personal withdrawals by the owner reduce equity and must be recorded in the Drawings account.
2
Identify the account to be credited for goods taken out of inventory
Credit Purchases account
The goods withdrawn were originally included in the Purchases account at cost price. Withdrawing them for personal use reduces the total cost of goods available for resale.

Key Concept

Double-entry accounting treatment for goods withdrawn by owner for personal use
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Topics

Treatment of Owner's Capital, Drawings, and Goods Withdrawn

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