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Difficulty: HardTreatment of Owner's Capital, Drawings, and Goods Withdrawn

At the end of the financial year, a sole trader's trial balance showed total purchases of ₦520,000₦520,000. An audit revealed that goods costing ₦35,000₦35,000 (with a selling price of ₦48,000₦48,000) taken by the proprietor for personal consumption were incorrectly credited to the sales account at selling price. What is the adjusted figure for purchases to be reported in the trading account?

  1. A
    ₦472,000₦472,000
  2. ₦485,000₦485,000Answer
  3. C
    ₦520,000₦520,000
  4. D
    ₦555,000₦555,000

Answer

The adjusted figure for purchases to be reported in the trading account is ₦485,000₦485,000.
When a sole proprietor withdraws goods for personal consumption, the double entry requires debiting Drawings Account and crediting Purchases Account with the cost price of the goods. Subtracting the cost price (₦35,000₦35,000) from the unadjusted purchases (₦520,000₦520,000) yields the net purchases figure of ₦485,000₦485,000 for the trading account.

Step-by-Step Solution

1
Identify the accounting rule for goods withdrawn by the proprietor
Goods taken for personal use must be recorded as drawings at cost price, reducing purchases.
The business entity concept dictates that personal withdrawals are not business operating expenses/purchases.
2
Determine the relevant value of goods withdrawn
Cost price = ₦35,000₦35,000
Purchases are recorded at cost, so any reduction in purchases must be made at cost price, not selling price.
3
Calculate the adjusted purchases figure
₦520,000−₦35,000=₦485,000₦520,000 - ₦35,000 = ₦485,000
Deducting cost price of goods withdrawn from trial balance purchases gives the net purchases for trading calculation.

Key Concept

Accounting Treatment of Goods Withdrawn by Proprietor
Estimated Time:2m 0s
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Topics

Treatment of Owner's Capital, Drawings, and Goods Withdrawn

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