A sole trader withdraws goods costing Rs. 8,000 for personal use. What is the effect on the financial statements?
Correct answer: A. Drawings increase and purchases decrease
- A. Drawings increase and purchases decrease
- B. Sales increase and drawings decrease
- C. Capital increases and purchases increase
- D. Expenses increase and sales decrease
Explanation
Goods taken by the owner are treated as drawings, not as business sales. The cost of goods withdrawn is removed from purchases, while drawings reduce the owner's capital.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
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More Financial Statements of Sole Traders questions
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A sole trader earns gross profit of Rs. 95,000 and incurs office expenses of Rs. 18,000, selling expenses of Rs. 12,000 and finance cost of Rs. 5,000. What is the net profit?
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A sole trader earns commission of Rs. 15,000 during the year, but Rs. 3,000 remains receivable at year-end. What amount of commission income is reported for the year?
A sole trader's cash book shows a credit balance at the reporting date. How is this balance normally presented?
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