IGCSE Accounting 0452 - 5.1 Sole Traders

Objective: Making Adjustments for Goods Taken for Own Use

This section explains how to adjust the accounts of a sole trader when the owner takes goods from the business for personal use. This is an important adjustment to ensure the financial statements accurately reflect the true financial position of the business.

Why is an Adjustment Needed?

When a sole trader takes goods for personal use, the business is effectively giving away an asset. This reduces the value of the inventory and the cost of goods sold. Therefore, an adjustment is required to ensure the financial statements are accurate.

The Calculation

The adjustment involves calculating the cost of the goods taken for personal use. This is done using the following formula:

Cost of goods taken = Market Value - Cost price

The market value is the current selling price of the goods, while the cost price is what the owner originally paid for them.

Journal Entry

The adjustment is recorded in a journal using the following journal entry:

Date	Account Name	Debit	Credit
	Inventory (or Cost of Goods Sold)
	Cost of Goods Taken for Own Use
	(To record goods taken for personal use)	$	$

The debit entry reduces the value of the inventory (or increases the cost of goods sold), and the credit entry creates a new account called 'Cost of Goods Taken for Own Use'. This account is typically shown on the face of the statement of financial position.

Example

A sole trader has an inventory of £2,000. The owner takes £300 worth of goods for personal use. The market value of these goods is £500, and the cost price was £300.

1. Calculate the cost of goods taken: £500 (Market Value) - £300 (Cost Price) = £200
2. Journal Entry:

   Date	Account Name	Debit	Credit
   	Inventory	£200
   	Cost of Goods Taken for Own Use		£200
   	(To record goods taken for personal use)

The inventory is reduced by £200, and a new account 'Cost of Goods Taken for Own Use' is created with a credit balance of £200.

Statement of Financial Position

The 'Cost of Goods Taken for Own Use' account is typically shown on the face of the statement of financial position as a deduction from the total inventory.

For example, if the original inventory was £2,000 and £200 worth of goods were taken for personal use, the adjusted inventory balance would be £1,800.

Important Considerations

• The market value should be a reasonable estimate of the current selling price.
• The cost price should be the original cost the owner paid for the goods.
• This adjustment is usually made at the end of the accounting period.