Section A

A sole trader takes goods from inventory for personal use. The goods originally cost $400 and had a selling price of $600.

What is the correct double entry to record this transaction?

Answer options:

Debit Drawings $600; Credit Sales $600

Debit Drawings $400; Credit Inventory $400

Debit Drawings $400; Credit Purchases $400

Debit Purchases $400; Credit Drawings $400

How to approach this question

Remember that a sole trader cannot make a profit from themselves. Therefore, goods taken for personal use are recorded at cost. The entry removes the cost from the business expenses (Purchases) and charges the owner (Drawings).

Full Answer

C.Debit Drawings $400; Credit Purchases $400✓ Correct

When an owner takes goods for personal use, it is treated as drawings. The goods must be valued at cost ($400) because the business cannot recognize a profit on a transaction with its owner. The double entry is Dr Drawings (to increase owner's drawings) and Cr Purchases (to reduce the cost of goods sold).

Common mistakes

Recording the transaction at selling price ($600) or crediting Sales.

Question 28 All questions Question 30

Practice the full ACCA FA — Financial Accounting Practice Exam 1

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