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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Mehta Traders, a sole proprietorship, distributed goods costing Rs 8,000 from its stock as free samples to prospective customers. What is the correct accounting treatment in the final accounts?

The goods are a business expense, so Advertisement or Sales Promotion account is debited and Purchases account is credited with the cost of Rs 8,000. This removes them from cost of goods sold and charges them to Profit and Loss. They are not drawings, because the owner did not take them for personal use.

  1. ADebit Advertisement (or Sales Promotion) account and credit Purchases account, so the cost is deducted from purchases in the Trading AccountCorrect
  2. BDebit Drawings account and credit Purchases account
  3. CDebit Advertisement account and credit Sales account
  4. DDebit Trading Account and credit Stock account, with no other entry

Explanation

Free samples are a business promotion expense, not a personal withdrawal by the owner. The cost of Rs 8,000 is therefore credited to Purchases, which reduces the cost of goods sold, and debited to Advertisement, which goes to the Profit and Loss Account. Debiting Drawings would wrongly treat it as personal use of goods. Crediting Sales would overstate revenue.

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