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Hello Sir,
”Recepts should be set off against drawings.For example , if a business owner receives $600 in dividend income from investment not owned by the business and pays it into their business bank account ,then the accounting entry is : DR cash CR drawings ”
This extract I get it from bpp textbook,I wonder is it correct?so drawings acc could have credit balance and add to the capital account even though the income not owned by the business?
Thank you.It is perfectly correct.
Any money paid into the business by a sole trader will increase the total capital. You can either credit capital or credit drawings – in both case the total capital will end up increasing.
(Usually for large amounts you would credit capital whereas for small amounts you would credit drawings – but either is OK and will give the same end result.)Thanks Sir, I can understand now.
By the way,why we must credit purchase account while the inventory drawing by owner ? Why not credit inventory account? Both account will affected gross profit in different way,one will increase and another will decrease it.The reason is that the entry in the inventory account is only made at the end of the year (as I explain in my free lectures) and is of the inventory that is counted at the very end of the year.
The owner will not wait until the end of the year after the inventory has been counted, and then take some goods – he or she will have taken goods during the year.
Everything the business has purchased during the year will have been debited to the purchases account, but if some of the goods have been taken by the owner then the business has only been actually using the rest of them. So we credit purchases with the drawings – the balance left on the purchases account will be those goods actually used by the business.
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