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Dear sir,
I’ve learned that when traders makes drawing of inventories for personal use, the correct entry is Debit drawings and Credit Purchases. Given this, I think the impact on COGS is that it makes COGS smaller (since COGS = Beginning inventory + Purchases- Ending inventory), and this should translate into higher earnings, and higher equity, higher capital balance.
At the same time, “debitting drawings” should result a smaller capital balance.
These two seem to contradict with each other. Can you help to clarify? thanksLiming
I do not understand why you should think that they contradict!
Imagine if the owner had instead taken cash from the business and used the cash to buy the goods personally (instead of having the company buy then and then take them himself).
The business would have bought less, so the profit (and therefore the capital) would be higher. There would have been more drawings and therefore the capital would be lower.
There is no contradiction at all – there is no reason whatsoever that it should affect the total owing to the owner.
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