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ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting

Maria runs a sole trader business. During the year she takes $2,000 of goods from inventory, at cost, for her family's personal use and makes no entry. Which concept is breached, and what is the correct treatment?

The business entity concept is breached. Goods taken by the owner for personal use must be recorded as drawings at cost, debiting drawings and crediting purchases or inventory by $2,000, because the owner and the business are separate for accounting purposes.

  1. AGoing concern; record the goods as a reduction in non-current assets
  2. BBusiness entity; record the $2,000 as drawings, reducing inventory/purchases and capitalCorrect
  3. CMateriality; ignore because the amount is small
  4. DMoney measurement; record the goods at selling price as sales

Explanation

The business entity concept treats the owner and business as separate. Goods taken for personal use are drawings: Dr Drawings $2,000, Cr Purchases (or Inventory) $2,000. Treating it as a sale at selling price would be wrong because no sale to a third party occurred.

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