Mrs. Adebayo, a sole trader, withdrew goods costing \text{₦}15,000 (with a retail selling … — JAMB UTME

Mrs. Adebayo, a sole trader, withdrew goods costing $\text{₦}15,000$ (with a retail selling price of $\text{₦}22,000$ ) from her inventory for personal family use. Which of the following is the correct double entry to record this transaction?

Debit Drawings account $\text{₦}15,000$ ; Credit Purchases account $\text{₦}15,000$ Answer
B
Debit Drawings account $\text{₦}22,000$ ; Credit Sales account $\text{₦}22,000$
C
Debit Purchases account $\text{₦}15,000$ ; Credit Capital account $\text{₦}15,000$
D
Debit Drawings account $\text{₦}15,000$ ; Credit Capital account $\text{₦}15,000$

Answer

Debit Drawings account

\text{₦}15,000

and Credit Purchases account

\text{₦}15,000

When an owner withdraws goods for personal use, the business must reduce the cost of purchases available for resale at cost price. The correct entry is to debit Drawings (to track owner withdrawals) and credit Purchases (to reduce total cost of sales) by

\text{₦}15,000

Step-by-Step Solution

Determine the valuation price for owner drawings of inventory

The goods must be recorded at cost price (

\text{₦}15,000

), because an entity cannot record a profit on goods consumed by its owner.

According to accounting principles, withdrawals are valued at cost to eliminate unrealized profit.

Identify the account to debit

Debit Drawings account with

\text{₦}15,000

Drawings represent resources taken out by the owner, which reduces owner's equity.

Identify the account to credit

Credit Purchases account with

\text{₦}15,000

Crediting Purchases reduces total cost of goods purchased for resale during the trading period.

Key Concept

Goods Withdrawn by Owner for Personal Use

Estimated Time:45s

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