I am working through Accounting Skills by Margaret Nicholson and just completed an assignment which included having to record the accounts to be credited and debited in a scenario where the proprietor takes goods out of the business for his/her personal use.
I recorded my answer as Debit DRAWINGS and credit SALES but the correct answer is recorded as a credit to PURCHASES. Why is the use of the Purchase Ledger seen to be more correct than the Sales Ledger or even the Purchases Returns Ledger?
Any assistance/views would be greatly appreciated.
Whilst the book is not incorrect I think that Margaret could have chosen a better name for the T account in the book espechially considering the intended audience.
Personally I would have called it stock.
The stock is reduced (credited) but this is not actually a sale.
in the real world if such transactions were taken as sales then directors would take a load of stock before the year end to make the books look better then return them just after year end (actually a similar fraudulent practice does happen. It's known as window dressing but a third party would be involved in such fraud).
Simple answer, unless I've totally misread this, what Margaret calls Purchases think of as stock.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I've really got to either type faster or write less... Nick beats me again (but by a minute or less this time so I'm getting faster).
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
It's because you are taking goods out of the business, not selling them.
To credit sales would screw up your gross profit margin.
Thanks Nick.
My thought process was that I would record the reduction to the goods held by the business as Sales to the Proprietor but at the cost price, thereby creating neither a profit nor a loss.
But such would still be a sale appearing in the P&L so the entities financial statements would not be representative of the truth of the underlying financial reality of the transactions.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
But such would still be a sale appearing in the P&L so the entities financial statements would not be representative of the truth of the underlying financial reality of the transactions.
Thanks Shamus.
Would this still be an issue even though the narrative recorded on the Sales Ledger would state Drawings as the offset account, clearly reflecting that the goods went to the proprietor?
I can understand that the Sales figure would be hiked, which is not correct, but part of me is still thinking that by recording it on the Purchase Ledger I am corrupting the record related to the total goods purchased which is equally an unfair representation of the truth of the financial transactions. Maybe I am just not far enough through the book at this stage to understand the full implications.
I fully appreciate the issue that your having with this one but think of it this way, stock disappears for other reasons such as wastage, obsolesence, theft, etc. but sales are by definition the money that is being brought into the company so it is extremely important to the shareholders to know that figure can be compared against similar entities and against previous periods and that it does actually represent genuine sales.
The owner taking goods for own use is not a genuine sale unless they bought the goods from the company on commercial terms such as going into the factory outlet and purchasing the item over the counter in which case it would be a genuine sale.
It will become a lot clearer once you get to the stage of drawing up a Profit and Loss account.
Unfortunately, margarets books only deals with the mechanics of bookkeeping and doesn't go into accounting concepts so you may hit a few situations like this.
If you are getting into difficulties with theory then the next book for your shopping list should be Business Accounts for book-keeping and financial accounting courses by David Cox (ISBN 1872962637). This hits the subject more from an accounts than bookkeeping angle but still covers similar ground to the Accounting Skills book by Margaret Nicholson.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I've quite often seen an own consumption code/ item within the Cost of sales section which you could use.
Thanks Phil
I was just wondering whether I should add a ledger called Purchases Proprietor to do a similiar job as Purchases Returns with the net of these 3 accounts being the cost of goods available for sale.
What kind of values are you talking about here? I would think it sufficient to just post a journal entry CR purchases DR drawings stating in the narrative that it is goods for own use if it isn't much. I wouldn't use the purchase or sales ledger to adjust, though obviously the purchase invoice for the goods initially will be posted in the purchase ledger.
Sometimes in real life if you keep adding new nominal accounts you end up with too many, often it is not necessary as it will all get categorised in the final accounts as cost of sales and drawings anyway.
Like I say though, depends how significant the values are.
Carole
-- Edited by littlebookkeeper on Thursday 28th of April 2011 04:07:49 PM
