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Difficulty: HardGoods Withdrawn by Owner for Personal Use

Mrs. Adebayo, a boutique owner, prepared a draft Trading Account that reported a Gross Profit of ₦180,000. It was subsequently discovered that goods costing ₦35,000, with a retail selling price of ₦50,000, taken by the owner for personal use were erroneously recorded by crediting the Sales Account at selling price, while no entry was made in Purchases. What is the corrected Gross Profit?

  1. ₦165,000Answer
  2. B
    ₦215,000
  3. C
    ₦180,000
  4. D
    ₦195,000

Answer

The corrected Gross Profit is ₦165,000.
The correct answer of ₦165,000 accounts for both error corrections on the draft Trading Account. First, crediting Sales with ₦50,000 was incorrect because owner drawings are not revenue sales; reversing this decreases Gross Profit by ₦50,000. Second, goods withdrawn for personal use must be credited to Purchases at cost price (₦35,000), which reduces the Cost of Goods Sold and thereby increases Gross Profit by ₦35,000. Combining these gives ₦180,000 - ₦50,000 + ₦35,000 = ₦165,000.

Step-by-Step Solution

1
Reverse the erroneous entry in the Sales Account
Sales was overstated by ₦50,000. Reversing this decreases Gross Profit by ₦50,000.
Goods withdrawn for personal use are not business sales and must not be credited to Sales.
2
Record the correct adjustment for goods withdrawn in Purchases at cost price
Purchases (and thus Cost of Goods Sold) is reduced by ₦35,000, which increases Gross Profit by ₦35,000.
Goods taken by the owner reduce total stock available for sale and must be credited to Purchases at cost price.
3
Calculate the net corrected Gross Profit
₦180,000 - ₦50,000 + ₦35,000 = ₦165,000
Combine the original draft figure with the two individual adjustments.

Key Concept

Accounting adjustment for goods withdrawn by owner for personal use and error correction in Trading Account
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Topics

Goods Withdrawn by Owner for Personal Use

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