How to record goods taken for own use

Step by step

1. Value the goods at cost. Record the goods the owner takes at their cost to the business, not the selling price.
2. Credit purchases. Reduce purchases by the cost of the goods taken, since they will not be sold.
3. Debit drawings. Increase drawings by the same amount, as the owner has taken value from the business.
4. Check the effect on profit. Reducing purchases raises gross profit. The drawings reduce capital.
5. Show drawings in the capital section. Deduct the drawings total from capital in the statement of financial position.

Worked example

An owner takes RM300 of goods. Credit purchases RM300 and debit drawings RM300.

Understanding the method

In accounting, the business and its owner are separate, even when they are the same person. This is the business entity concept.

When the owner takes goods home, the business has given up inventory it bought to sell. Those goods must not stay in purchases as if they were available to customers.

The owner has also taken value from the firm. That is what drawings are, here in goods instead of cash. So the entry does two things: it takes the goods out of the trading figures, and it records the owner's withdrawal.

Debit drawings and credit purchases with the cost of the goods. Crediting purchases reduces the cost of goods bought for resale, which is right because these goods were never sold. Debiting drawings records what the owner received.

Use cost, not selling price. The business has lost only what the goods cost it, and no sale has happened, so there is no profit to record. Using selling price would invent a profit.

The wording can vary: goods taken for personal use, for the family, to furnish the owner's home, or stock consumed by the proprietor. All are the same event. Sometimes only a selling price and a mark-up are given, so first remove the profit to find cost.

If goods are given away instead, for example as free samples or to charity, credit purchases as before. Debit an expense such as advertising or donations, because the value has not gone to the owner.

Here is an example. A grocer's purchases for the year are RM80,000.

The owner took groceries home that cost the business RM3,000. Debit drawings RM3,000 and credit purchases RM3,000.

In the income statement, purchases are now RM77,000. Cost of sales is no longer inflated, and gross profit reflects the goods actually sold.

In the statement of financial position, drawings of RM3,000 reduce the owner's capital. It is no different in substance from the owner taking RM3,000 in cash.

To check, the same amount at cost must be debited to drawings and credited to purchases. Cost of sales should fall by that amount, gross profit should rise, and total drawings should increase by the same figure.

Common mistakes include recording the goods at selling price, which creates a profit that never happened. Another is crediting sales instead of purchases, which treats own use as a sale to a customer. Others are reducing purchases but forgetting the debit to drawings, and leaving the adjustment out altogether, so private use sits in cost of sales and understates profit.

If you are unsure whether a question wants drawings or an expense, we can help. One of our teachers can help you spot the wording and practise the entry on past-paper style questions. Book a trial class

Related skills

• How to prepare an income statement for a sole trader
• How to prepare a statement of financial position
• How to write a journal entry

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.