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The following information is available for a sole trader who keeps no accounting records
$
Net Business assets at 1 July 2004 186,000
Net Business assets at 30 June 2005 274,000
Cash drawings by proprietor ???
Additional Capital Introduced by proprietor 50,000
Business cash used to buy a car for the proprietor’s wife who takes no part in the business 20,000
Net profit for the year 126,000What was the cash drawings during the year ended 30 June 2005?
A $20,000
B $108,000
C $88,000
D $68,000Okay. So my question is..The cash drawings is $68,000 as represented by the ??? BUT
is that the answer or will it be $88,000…including the $20,000 used to buy the car?The increase in net assets is 88,000 – 20,000 = 68,000. (The business will be including the car in its net assets, but it should not be doing). The profit is 126,000, and the capital introduced is 50,000.
Using the accounting equation, this gives the drawings as being 108,000. This is total drawings and therefore the cash drawings are 108,000 – 20,000 = 88,000.Prof,
I understand your solution but still would like to know two things:
1. Why is the 20,000 used to purchase the car not regarded as cash drawings?
(Cash used from the business bank account for personal use). If so then the cash drawings could be 108,000.2. How do we know the closing Net business assets includes the 20,000 for the car purchase?
After all the statement says “Business cash used to buy a car for the proprietor’s wife who takes no part in the business” and could mean that business cash was used but was treated in the SOFP as drawings hence the closing net assets will be net of that.Hope I am making some sort of sense there…
1. Taking a car is taking a car – it is drawings, but a car is not cash!!
2. If business cash was used, then presumably it was recorded as though it was a business transaction.
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