Question

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

• A. Increase in Net Profit
• B. Decreases in Net Profit
• C. No Effect on Net Profit
• D. None of these

Answer 1

Answer: (B)

Decreases in Net Profit

Net profit is calculated from the gross profit transferred from the trading account to the profit and loss account. Increase or decrease in value of gross profit directly affects the net profit.

When the proprietor withdraws goods, the journal entry passed is -

Drawings A/c Dr 10000

To Purchases A/c 10000

This amount is reduced from the purchases account balance. when this amount is not reduced i.e., the transaction is not recorded, the purchases account balance increases leading to less gross profit and this gross profit is transferred to the profit and loss account to calculate net profit ,which eventually decreases.