Hi All,

First post so hoping you can help.

When a proprietor removes goods for his own use (drawings) this will cause profit to rise (as you are reducing you cost of goods sold) but it leaves assets unaffected - according to the answer in one of my books.

I can understand why profit improves, but why are assets not effected? The double entry for this is:

DR Drawings
CR Purchases

We are essentially reducing our assets and reducing our capital?! Or is this incorrect?

Thanks,
Ross

Hello Ross,

I may be incorrect here, but i dont see how an owner removing goods would affect the profit and loss account at all. The effect would be on the balance sheet, stock would fall and so would owners capital.

Thus DR drawings, because the company owes the owner less, and
CR Stock

Hi Guys
I think you are both a little confused.
I suggest you take a look at the earlier post ‘Clarification on Stock’.
If the owner takes out stock at cost (and records it correctly!) it has no affect on profit. 
Normally the bookkeeping would be debit drawings, credit purchases (not stock). Actual cost of sales remains the same as the closing stock is less.
Therefore on the balance sheet the stock is less than it would otherwise have been and drawings are higher, therefore the proprietors capital is less.  All by the same amount.
A word of caution, HMRC may not agree that the transfer to drawings should be at cost, but that is a different problem!

Sorry for any confusion.
Which bit is confusing you, and I will try to help.
Sometimes confusion results from the terminology being used and/or the nominal accounts that are being used to record the transactions.
For example, ‘stock’ is a current asset and is shown on the balance sheet.
Sometimes there is a separate stock account, and sometimes the stock figures are effected in the purchases account.
E.g.
Purchases account could read:-
Dr Opening stock brought forward   £1,000
Dr Purchases during the period     £9,000
Cr Closing stock carried forward           £1,500
Cr Transfer P&L - Cost of sales             £8,500
Account Totals               £10,000     £10,000

Dr Opening stock brought forward   £1,500

In this example there is not a separate stock account.  The closing stock balance of £1,500 will be shown in the balance sheet as a current asset.

On the other hand, the same result would be achieved by having a separate stock account, as follows:-
Purchases account
Dr Purchases during the period     £9,000
Cr Transfer to stock account
(increase in stock from £1,000
to £1,500)                          £500
Cr Transfer P&L - Cost of sales           £8,500
Account Totals               £9,000   £9,000

Stock account
Dr Opening stock             £1,000
Dr Transfer purchases
(increase in stock)            £500
Cr Closing stock carried forward           £1,500
Account Totals               £1,500   £1,500

Dr Opening stock in new period     £1,500

Again, the closing stock of £1,500 shows in the balance sheet as a current asset.

Although ‘debit’ and ‘credit’ rules are strict there is very often more than one way to ‘skin the proverbial cat’.
Understanding what is required is always better than trying to memorise how the transactions should be entered.
It is possible from your comment that you are fairly early on in your studies.  If you have a senior or manager, then ask them to demonstrate by using ‘T’ accounts.
Once mastered - never forgotten!
Good luck.
P.S. I reviewed the post and the figures have not come out in columnar format.  Therefore I suggest that you re-write the entries on double column paper (or in debit and credit format)(or in ‘T’ accounts) as this will make it easier to understand (and may, in fact, resolve your confusion).

I suggest you take a look at the earlier post ‘Clarification on Stock’.
If the owner takes out stock at cost (and records it correctly!) it has no affect on profit.
Normally the bookkeeping would be debit drawings, credit purchases (not stock). Actual cost of sales remains the same as the closing stock is less.

Yes , it would leave the assets as same.

For example,

AB LLP(Partnership) has $1000 of stock at year end.Journal entry to recognise this will be-:
Journal 1:
Dr Closing stock (Balance sheet) - $1,000
Cr Closing stock ( Profit and loss)- $1,000

The owner has taken out $200 of stock. Journal entry would be
Journal 2:
Cr Closing stock $200(reduces stock in balance sheet)
Dr Drawings     $200(increase partners drawings in balance sheet)

So, now the correct closing stock to recognise in the balance sheet is $800

Now, you would correct your closing stock figures by putting the final correct figures in the P&L as follows, -:

Cr Closing stock ( P&L) - $800(where you had initially credited $1,000)

Anyone see a problem with this?

I certainly wouldn’t do it that way, surely the closing stock figure has been calculated taking into account the goods already taken?

I would be crediting purchases and debiting drawings.

ababil011 - November 17 2011 02:41 PM

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Your point being?

Hi Buttinski,

The moderators have removed this posting.

All the best
Steve