Comments

  1. Profile photo of Rustam says

    Mr John, are the drawings are levied by income/profits tax? and if the owner could have managed to make a tax collector believe that it is actually wages, then it ? net profit and ? tax levied…does it actually happen in business entities?
    Thank you sir,
    Rustam.

    • Profile photo of John Moffat says

      No. The owner is taxed personally on all the profit made by the business – it makes no difference how much or how little he/she took as drawings (or whatever he/she called the drawings).

      All of the profit belongs to the owner, and so the owner pays tax on all the profit. (That is the ‘real life’ position for sole traders!!)

    • avatar says

      Hi John!
      One thing I didn’t get, why would we consider wages and salaries as (drawings)? Just because it was taken by the owner? From what I know wages and salaries are considered to be business expense called salaries expense or so and yes they are deducted from the capital but they are not called “drawings”, drawings are what the owner takes out the capital for his own personal use, can you explain please?

      • Profile photo of John Moffat says

        Wages and salaries paid to other people are an expense and appear in the Statement of profit or loss.

        However anything taken by the owner is drawings. As I explain in the lecture, it does not matter if the own decides to call it something else (such as salary) – anything the owner takes is drawings and therefore does not appear in the Statement of profit or loss.

        (If I own a business then all the profit belongs to me – it would be ridiculous for me to take out more or less money and have as a result more or less profit, just because I decided to call it a salary)

  2. avatar says

    Hi John!

    Pretty long time! ln a merchandising company limited by shares, if one of the directors or shareholders took out goods which he didnt pay for, how l am going to treat that transcation: which of the accounts will l post it to?

    • Profile photo of John Moffat says

      That will not happen in the exam – if they did not intend to pay for them then it would be illegal!

      However, assuming they were intending to pay for them, then Dr Receivables Cr Sales (as with any customer buying on credit).

  3. avatar says

    if the owner takes out cash as wages…..why would it be a withdrawal….he maybe paying himself and others from the sum that he took from the business. How may we know then what exactly he took fro himself?

    • Profile photo of John Moffat says

      If he is paying himself then it is always drawings – never wages – whatever he/she might call it. Anything the owner takes for himself/herself is drawings whatever he/she calls it.

      If any of the money was in fact being used to pay wages to employees, then the question would tell you (and that money would indeed be wages). If you are not told that then you assume that it is all kept by him or her.

  4. avatar says

    Will it be correct to say other income like interest received, rent received…….. etc is extra ord. income considering that revenue is income generated in the normal operations of the business?

    Thanks always

    • Profile photo of John Moffat says

      We do not use the term extra ordinary income. However any other income is shown separately – I do say this in the lecture when I talk through the layout of the Income statement that is in Chapter 2 of the Course Notes (you will see there that they are shown separately under gross profit).

  5. avatar says

    I think it is correct to Cr Drawings and Dr Cash when the owner returns the cash taken out of the business or the cash equivalent of the goods he took?

    How do i classify office air conditional, fridge, tv etc in one word? Is it correct to say office machines?

    Thanks always for the time taken to reply!

    • Profile photo of John Moffat says

      Yes – that would be correct if the owner were to return cash taken out (although I would be very surprised if that happened in the exam :-) )

      With regard to air conditioning etc., there is no special name (the only ‘rule’ is that obviously they must come under the heading ‘non-current assets’.
      Office machines is fine, or furniture and fittings would be fine also.

  6. avatar says

    A situation where the owner supplies the office furniture for the business; will the office furniture be part of capital?
    If the owner takes goods from inventory how is going be treated in the B/S and Income Statement?

    • Profile photo of John Moffat says

      If the owner supplies furniture himself, then the double entry is Dr Furniture (which appears as a non-current asset in the SOFP) Cr Capital.

      If the owner takes goods from inventory, then the entry is Dr Drawings Cr Purchases.
      (most want to Cr inventory, but the reason this would not be correct is that the inventory figure on the SOFP is the inventory counted at the very end of the year which will be after the owner has taken any. When the business bought goods they will have Debited purchases – if the owner takes some then Cr purchases (which is sensible because only the remainder were actually used within the business) and Dr drawings (to charge the owner, in just the same way as we would Dr drawings if the owner had taken cash).

  7. avatar says

    prepayments comes under non-current assets. would you classify rent as a prepayment and if yes what if the rent was paid two years in advance then it should come under current assets because its over one year. how would you treat two years advance payment on rent in the statement of financial position.

    Thanks

    • Profile photo of John Moffat says

      Prepayments certainly do not come under non-current assets – they are current assets.

      Rent is a prepayment if it has been paid in advance and will be classified as a current asset (even if it is paid for two years in advance).

      Although we usually say that non-current assets are assets lasting more than one that is not the strict definition of them (the one-year rule is only a strict rule when it comes to current and non-current liabilities)

      Two years advance payment of rent is exactly the same as a prepayment of rent.

  8. Profile photo of Diana says

    Hi John, very useful lectures, thank you! Just a quick silly question: after taking large amounts of drawings and capital and the profit is fully repaid to the owner… how do we record the rest of wages/drawings if any, taking out by the owner? Is he allowed to withdraw more than he is owed?

    • Profile photo of John Moffat says

      A few things.
      Firstly, anything taken by the owner is called drawings (a sole trader does not pay wages to the owner – it is drawings).
      Secondly, there is no law stopping the owner taking as much drawings as they want (there is for limited companies but not for sole traders).
      However, in practice they will not take out more that they are owed (capital plus profits) because it would mean selling all the assets and having an overdraft with the bank. The bank is not going to let them have an overdraft if the business has no assets left :-)

    • Profile photo of John Moffat says

      Expenses are costs of running the business..

      Drawings are not an expense – it is money taken out of the business by the owner.

      An accrual is an expense for the period that has not yet been paid and is still owing.

  9. Profile photo of Mahoysam says

    Hi – One thing I didn’t get, why would we consider wages and salaries as (drawings)? Just because it was taken by the owner? From what I know wages and salaries are considered to be business expense called salaries expense or so and yes they are deducted from the capital but they are not called “drawings”, drawings are what the owner takes out the capital for his own personal use, can you explain please?

  10. avatar says

    Good tuition. I have a question. The financial year ends June 30, 2011. I have received an invoice for $1,200 for insurance which runs from May 1 2011 to 30 April 2012. What is the treatment of this invoice in the income statement and statement of financial position for the year ended June 30, 2011?

  11. avatar says

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