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

Rohan, a proprietor, takes goods costing Rs 15,000 from his shop for personal use and makes no entry. Which concept is violated, and what is the effect on the business profit?

The business entity concept is violated. Goods taken by the proprietor are drawings, separate from business activity, and must be recorded by crediting purchases and debiting drawings. Leaving them unrecorded leaves the stock and profit figures overstated, since goods that left the business are still counted.

  1. ABusiness entity concept violated; profit is overstated because purchases or stock are not adjusted for the drawingsCorrect
  2. BGoing concern concept violated; profit is understated
  3. CMoney measurement concept violated; profit is unaffected
  4. DConsistency concept violated; profit is understated

Explanation

The business and owner are separate entities, so goods taken by the owner are drawings and must be recorded (Drawings Dr, Purchases Cr). Without the entry, the cost of goods taken stays in cost of goods sold calculations as if still held or sold, leaving the books not reflecting the withdrawal and profit overstated by Rs 15,000 relative to the correct treatment of drawings reducing stock.

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