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Difficulty: MediumTreatment of Owner's Capital, Drawings, and Goods Withdrawn

A sole trader withdrew goods costing ₦28,000₦28,000, which had a selling price of ₦35,000₦35,000, from the business for personal domestic use. What is the correct double entry to record this adjustment?

  1. Debit Drawings account ₦28,000₦28,000, Credit Purchases account ₦28,000₦28,000Answer
  2. B
    Debit Drawings account ₦35,000₦35,000, Credit Sales account ₦35,000₦35,000
  3. C
    Debit Capital account ₦28,000₦28,000, Credit Sales account ₦28,000₦28,000
  4. D
    Debit Purchases account ₦28,000₦28,000, Credit Drawings account ₦28,000₦28,000

Answer

Debit Drawings account ₦28,000₦28,000, Credit Purchases account ₦28,000₦28,000
When a proprietor takes goods from the business for personal use, the transaction must be recorded at cost price (₦28,000₦28,000). The Drawings account is debited to reflect the increase in personal drawings, and the Purchases account is credited to reduce the cost of inventory available for sale.

Step-by-Step Solution

1
Identify the valuation basis for owner's withdrawals of inventory.
Goods withdrawn for personal consumption are valued at cost price (₦28,000₦28,000), because a trader cannot make a profit from themselves.
According to accounting principles, withdrawals are recorded at cost price, ignoring any mark-up or selling price.
2
Determine the account to debit.
Debit Drawings account with ₦28,000₦28,000.
Drawings represent resources taken by the proprietor, which reduces total owner's equity.
3
Determine the account to credit.
Credit Purchases account with ₦28,000₦28,000.
Goods available for resale are reduced when the proprietor takes inventory for private use, so Purchases must be reduced.

Key Concept

Treatment of Goods Withdrawn by Owner for Personal Use
Estimated Time:1m 0s
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Topics

Treatment of Owner's Capital, Drawings, and Goods Withdrawn

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