Ruby Jewellers Pty Ltd had a number of major business transactions and events during the year...

Ruby Jewellers Pty Ltd had a number of major business transactions and events during the year ended 30 June 2019. An extract is given below:

Transaction 1: The owner of Ruby Jewellers Pty Ltd Kathy Walworth used company funds to purchase a computer for her son’s university work for $3,000. Kathy recorded it as a decrease in cash and an increase in Office computer.

REQUIRED: Identify if any accounting concept or principle has been violated. If so, briefly explain the relevant concept or principle. (Word limit: 50 words for less) Record the correct journal entry that Ruby Jewellers Pty Ltd should have done if you believe they have violated any accounting concept or principle. (Narrations not required).

Expert Solution

ACCOUNTING CONCEPT VIOLATED: In the given case, the expenses related to the owner have been treated as business expenses, violating the basic Accounting Concept called the Business Entity or Seperate Entity Concept.

BUSINESS ENTITY CONCEPT:

This concept basically distinguishes personal transactions of the owner(s), from that of the Business.
No matter the Business belongs to the owners, but in a legal sense, the Business has its own Seperate legal entity that is distinct from its owners.
This is done in order to ascertain the correct Profit/Loss as well the Position of the business, excluding the transactions of the owners.

CORRECT JOURNAL ENTRY:
Kathy has recorded one aspect wrong in the journal entry. She has decreased cash of the business, which is correct but she has increased the office computer, which is incorrect. She should increase Drawings (which are the amounts/resources taken out from business for personal use), which lead to a decrease the owner's capital.

The correct journal entry is:
Dr.($) Cr.($)
Drawings 3,000
Cash 3,000
(Being cash withdrawn for personal use)

ekkarill92 answered 2 years ago

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