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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Gupta, a proprietor, takes goods costing Rs 8,000 from his shop for his family use. Which treatment follows the business entity concept?

Debit Drawings and credit Purchases by Rs 8,000. Under the business entity concept the owner is distinct from the business, so goods taken for personal use are drawings that reduce capital, and the business's purchases or stock is reduced at cost.

  1. ADebit Drawings Rs 8,000, credit Purchases Rs 8,000Correct
  2. BDebit Purchases Rs 8,000, credit Drawings Rs 8,000
  3. CDebit Sales Rs 8,000, credit Capital Rs 8,000
  4. DNo entry, because the owner and business are the same

Explanation

The business is treated as separate from its owner, so goods taken by the owner are drawings. Drawings account is debited, reducing capital, and Purchases (or stock) is credited at cost. Option B reverses the entry, and ignoring the entry would overstate the business's stock and profit.

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