Question

Goods costing Rs. 10,000 taken by the proprietor for personal use were not recorded. The errors will result in :

• A. Increase in Gross Profit
• B. Decrease in Gross Profit
• C. Non effect on Gross Profit
• D. Either (a) or (b)

Answer 1

The correct option is B Decrease in Gross Profit

When goods are withdrawn by proprietor, the journal entry passed is -

Drawings A/c Dr 10000

To Purchases A/c 10000

If this entry is not recorded in the books, the gross profit will decrease. Gross profit is calculated from the trading account, it is the difference between sales, closing stock and purchases, direct expenses. When the entry of drawing is not recorded the purchase account will show more debit balance, leading to decrease in the gross profit.

For example lets assume the transaction related to drawing of goods is not recorded and sales= 500000, closing stock= 50000, purchases=100000 and direct expenses= 20000. the gross profit here is 430000. This is when drawings is not deducted from the purchases.

After deducting the amount of goods withdrawn from purchases (100000-10000), the new gross profit is (550000 - 110000) 440000. This implies error of omission of entry of goods withdrawn reduces the gross profit.