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CMA Foundation · Fundamentals of Financial and Cost Accounting · Four Frameworks of Accounting and Forms of Organization

The proprietor of Iyer Stores takes goods costing ₹8,000 for personal use and pays his son's school fees of ₹12,000 from the business bank account. Which treatment is consistent with the business entity concept?

Both items are owner's drawings, so Drawings is debited ₹20,000, with Purchases credited ₹8,000 and Bank credited ₹12,000. Under the business entity concept, personal use of goods and personal payments are not business expenses and must not reduce business profit.

  1. ADebit Purchases ₹8,000 and Education Expense ₹12,000
  2. BDebit Drawings ₹20,000; credit Purchases ₹8,000 and Bank ₹12,000Correct
  3. CDebit Drawings ₹12,000 only; ignore the goods
  4. DDebit Salaries ₹20,000; credit Capital ₹20,000

Explanation

The business is separate from its owner, so both items are drawings: goods ₹8,000 plus cash ₹12,000, total ₹20,000. Drawings are debited and Purchases (for goods) and Bank are credited. Charging them as business expenses would reduce profit wrongly.

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