Question

Mr. Right and Mr. Wrong own an antique store in a partnership. They share profits and losses equally and receive an annual salary of $50,000, as per the partnership agreement. Mr. Right travels the country buying antiques. Mr. Wrong manages the store. From time to time, they use some of the small items from the store merchandise for personal use. Mr. Wrong’s daughter is getting married, and she loves an antique piece that costs $5,000. Mr. Wrong makes the following entry on the books to record the transaction:

Cost of goods sold $5,000 (Debit)
Inventory $5,000 (Credit)

1 - How should Mr. Wrong have recorded the transaction?
2 - What are the ethical aspects of Mr. Wrong’s action?

Answer 1

1. The Capital account should be debited but the inventory column is correct because the item is being removed from inventory because it can no longer be sold. This is a
balance sheet transaction. As for the ethical aspects of the action, this is not ethical because Mr. Wrong took for his daughter was not something small and entering the information in the cost of goods sold column makes it look as if this item was purchased and there was a profit made.