Sole Proprietor's Profit with Hidden Drawings
M/s Konark Stores, a sole proprietor, extracted the following balances on 31 March 2024: opening stock ₹1,20,000; purchases ₹6,80,000; wages ₹90,000; salaries ₹1,44,000; rent ₹60,000; insurance ₹24,000; debtors ₹2,50,000; machinery ₹4,00,000; cash ₹35,000; drawings ₹50,000; sales ₹11,20,000; sundry creditors ₹2,13,000; bank overdraft ₹80,000; capital ₹4,40,000. Adjustments: closing stock ₹1,50,000; wages outstanding ₹10,000; insurance prepaid ₹6,000; bad debts ₹10,000 and a provision for doubtful debts at 5% on remaining debtors; depreciation on machinery at 10%; goods costing ₹8,000 withdrawn by the proprietor were included in purchases but no entry was made for the withdrawal. The proprietor asks whether the goods withdrawn should be shown as an expense and what profit and capital figure will finally appear.
1. Compute net profit for the year and closing capital.
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Purchases must be reduced by goods withdrawn: ₹6,80,000 − ₹8,000 = ₹6,72,000. Wages become ₹90,000 + ₹10,000 = ₹1,00,000.
Cost of goods sold = ₹1,20,000 + ₹6,72,000 + ₹1,00,000 − ₹1,50,000 = ₹7,42,000.
Gross profit = ₹11,20,000 − ₹7,42,000 = ₹3,78,000.
Expenses: salaries ₹1,44,000; rent ₹60,000; insurance ₹24,000 − ₹6,000 = ₹18,000; bad debts ₹10,000; provision = 5% of ₹2,40,000 = ₹12,000; depreciation = 10% of ₹4,00,000 = ₹40,000. Total = ₹2,84,000.
Net profit = ₹3,78,000 − ₹2,84,000 = ₹94,000.
Closing capital = ₹4,40,000 + ₹94,000 − ₹50,000 drawings − ₹8,000 goods withdrawn = ₹4,76,000.
2. Prepare the balance sheet and explain why the goods withdrawn are not an expense.
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Balance sheet as at 31 March 2024
| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Capital | 4,76,000 | Machinery less depreciation | 3,60,000 |
| Sundry creditors | 2,13,000 | Closing stock | 1,50,000 |
| Bank overdraft | 80,000 | Debtors: 2,40,000 − provision 12,000 | 2,28,000 |
| Outstanding wages | 10,000 | Cash | 35,000 |
| Prepaid insurance | 6,000 | ||
| Total | 7,79,000 | Total | 7,79,000 |
Goods withdrawn are drawings, not a business expense. They reduce purchases (and therefore increase gross profit by ₹8,000) but are deducted from capital as drawings. If they were wrongly debited to profit and loss, net profit would fall to ₹86,000 and drawings would remain ₹50,000; closing capital would still be ₹4,76,000, but the reported profit would be distorted.