A sole trader extracted a trial balance showing total purchases of ₦450,000. During the fi… — JAMB UTME

A sole trader extracted a trial balance showing total purchases of $₦450,000$ . During the financial year, the proprietor withdrew goods costing $₦25,000$ , which had a selling price of $₦32,000$ , for personal domestic use. If no adjustment has been made in the accounting records, what is the correct figure for purchases to be reported in the Trading Account?

A
$₦418,000$
$₦425,000$ Answer
C
$₦475,000$
D
$₦482,000$

Answer

₦425,000

When an owner withdraws goods for personal use, the transaction reduces total business purchases. The reduction must be made at cost price (

₦25,000

) rather than selling price (

₦32,000

) to reflect the actual cost incurred by the business. Subtracting

₦25,000

from the unadjusted purchases figure of

₦450,000

gives the correct Trading Account purchases figure of

₦425,000

Step-by-Step Solution

Identify the accounting rule for goods withdrawn by the owner

Goods taken by the proprietor for private use must be debited to Drawings Account and credited to Purchases Account at cost price.

The goods were purchased for resale, but since they were consumed personally, they must be removed from the cost of goods available for sale at cost.

Select the correct valuation price

Use the cost price of

₦25,000

(ignore the retail selling price of

₦32,000

Drawings of goods are recorded at cost price to avoid recognizing unrealized profit on personal consumption.

Calculate adjusted purchases for the Trading Account

\text{Adjusted Purchases} = ₦450,000 - ₦25,000 = ₦425,000

Deducting cost of goods withdrawn gives the net purchases available for business sales.

Key Concept

Treatment of Goods Withdrawn by Proprietor at Cost Price

Estimated Time:1m 30s

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