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Doubts;_

vikas gupta (c.a final....) (714 Points)

28 December 2010

1. Why do we deduct drawings from purchases in trading a/c and not from closing stock?

2.Stock

To Purchases entry...?

3.Goods sent on hire purchase has been shown in general trading a;/c on cost....why?

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Drawings of Stock/Goods, withdrawn for Personal use

Drawings of stock implies the Stock/Goods taken away by the proprietor or the partner for personal purposes. These goods are to be valued at cost and not at their selling prices.

Debit » Drawings a/c
The value of goods taken away being drawings has to be debited to the "Drawings a/c" which represents the owner of the business.
[Drawings a/c – Personal a/c – Debit the benefit receiver.]

Credit »
The value of goods withdrawn by the proprietor represents the value of stock that has not been used for trading purposes. To reveal the cost of goods sold, the value of stock unused for trading activity is to be deducted from the total value of goods.
For this the following ledger account would be credited depending on the time of recording the transaction, what comprises the value of stock drawn and the account in which the related value exists at the time of recording the entry.
- Trading a/c
  Generally, at the end of the accounting period, the balances (amounts) in all the ledger accounts which go into the value of goods/stock, are closed by transfer to the "Trading a/c". This amounts to debiting the "Trading a/c" with the total value of goods/stock.
  Thus the value of stock drawings has to be credited to the "Trading a/c" in which the total value of goods/stock is existing as a debit balance.
  
  Journal/Ledger »
- Goods Consumed a/c
  Where the "Goods Consumed a/c" is used, the balances (amounts) in all the ledger accounts which go into the value of goods/stock (including opening stock) are transferred to it. Thus the "Goods Consumed a/c" would hold the total value of stock (as a debit balance).
  Thus the value of stock drawings has to be credited to the "Goods Consumed a/c" in which the total value of goods/stock is existing as a debit balance.
  
  Journal/Ledger »
- Purchases a/c
  Where the following conditions exist, we can credit "Purchases a/c" with the value of stock drawings.
  - The stock drawn is physically relatable to the stock that has been purchased during the current period.
  - There are no direct expenses in relation to the stock purchased during the current period
    (Or)
    The value of stock drawn does not include the direct expenses incurred during the current period
  Journal/Ledger »
- Stock Drawings a/c
  Where such transactions occur frequently, the organisation may create a controlling account by name "Stock Drawings a/c". This is a nominal account that gives the information relating to the total value of stock withdrawn by the proprietor or all the partners during the accounting period.
  Journal/Ledger »

The "Drawings a/c" is a personal account intended to give the information relating to the drawings made by the proprietor separate from the capital account. This account may be closed by transfer to the "Capital a/c" at the end of the accounting period, whereby the account is created anew every year. Alternatively, it may be carried forward to the subsequent periods just like any other personal account.

When the "Drawings a/c" is carried forward, it should be shown on the assets side of the balance sheet (as it has a debit balance). However, it shown as a deduction from its related account, the "Capital a/c" on the liabilities side of the balance sheet.

Balance Sheet of M/s ______ as on 30th June 2006
Liabilities	Amount	Amount	Assets	Amount	Amount
Capital (+)Net Profit	xx xx	xxx	Drawings		28,000

However, to derive the information relating to the net amount relating to the proprietor within the organisation, it is shown as a deduction from its related account, the "Capital a/c", on the liabilities side of the balance sheet.

Balance Sheet of M/s ______ as on 30th June 2006
Liabilities	Amount	Amount	Assets	Amount	Amount
Capital (+)Net Profit (−)Drawings	xx xx 28,000	xx

Adjustment during Final Accounting

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e. towards the end of the accounting period.

Regular Entries	Net Effect
1) Drawings a/c Dr To Trading a/c 2) Capital a/c Dr To Drawings a/c	Capital a/c Dr To Trading a/c

Since adjustment is needed at the end of the accounting period, we assume that the journal entry to record the drawings of stock is
Dr. Drawings a/c
Cr. Trading a/c

The net effect would give an understanding on where the amounts are to be adjusted.

The value of stock withdrawn is to be

Credited to the "Trading a/c"
It is generally shown as a deduction from purchases on the debit side of the "Trading a/"
Deducted from Capital on the liabilities side of the balance sheet (as additional drawings)

Trading a/c

Particulars	Amount (in Rs)	Amount (in Rs)	Particulars	Amount (in Rs)	Amount (in Rs)
To Purchases (−) Drawings	8,48,000 28,000	8,20,000

Balance Sheet of M/s ______ as on 30th June 2006
Liabilities	Amount	Amount	Assets	Amount	Amount
Capital (+)Net Profit (−)Drawings (−)Stock Draw	xx xx xx 28,000	xx

The stock that is used by the proprietor or the owner for personal purposes represents the stock that is used within the organisation. This is because the organisation and owners are treated one and the same for the purpose of identifying transactions that generate income. As such the drawings of stock have to be valued at cost based on the principle that "one cannot make a profit out of a transaction with one self".

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