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?
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.
1 - Mr. Wrong should not have recorded the transaction as Cost of goods sold and Inventory because taking an antique piece for personal use is not a legitimate business expense. Instead, he should have recorded it as a withdrawal or distribution from the partnership.
2 - The ethical aspects of Mr. Wrong's action are questionable. Taking merchandise from the store for personal use without proper authorization or payment is considered dishonest and unethical. It is a breach of trust within the partnership and could be seen as stealing from the business. Furthermore, using company resources for personal gain, especially for personal events like his daughter's wedding, is not in line with ethical business practices.
1 - To properly record the transaction, Mr. Wrong should have made the following entry:
Inventory (Asset) $5,000 (Debit)
Drawing (Equity) $5,000 (Credit)
This entry reflects the fact that Mr. Wrong used store merchandise for personal use, which is considered a withdrawal from the business. By debiting the Inventory account, it reduces the value of the inventory on the books to reflect the item that was taken. Simultaneously, crediting the Drawing account records the personal use of the item and reduces the capital of Mr. Wrong in the business.
2 - The ethical aspects of Mr. Wrong's action raise concerns. Firstly, it is important for partners to follow ethical guidelines when running a business together, which includes maintaining integrity and honesty in financial transactions.
Using store merchandise for personal use without proper documentation or payment can be considered a breach of trust and misuse of business resources. Mr. Wrong is essentially taking an item from the store inventory without compensating the partnership for its value. This action can negatively impact the financial health of the business and create an unfair advantage for Mr. Wrong's personal interest at the expense of the partnership.
Additionally, the entry recorded on the books does not accurately represent the transaction. It is misleading to record the transaction as a cost of goods sold, which implies that the item was sold to a customer. This misrepresentation can potentially deceive stakeholders, such as creditors or investors, who rely on accurate financial reports to make informed decisions.
In summary, Mr. Wrong's action raises ethical concerns regarding the misuse of business resources, breach of trust, and misrepresentation of financial information. It is crucial for business partners to align their actions with ethical principles to ensure the fair and transparent operation of the partnership.