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Difficulty: Very hardAdjustments for Bad Debts and Provision for Doubtful Debts

The trial balance of Kalu Enterprises as at 31st December 2025 showed Trade Debtors of ₦520,000₦520,000 and an existing Provision for Doubtful Debts of ₦22,000₦22,000.

The following additional information is provided at year-end:
1. An additional debt of ₦40,000₦40,000 is confirmed irrecoverable and must be written off.
2. A dishonoured cheque of ₦20,000₦20,000 from a debtor was recorded in the cash book but not yet posted to the debtors ledger.
3. A amount of ₦5,000₦5,000 was received in cash during the year for a debt written off in 2024, but no entry has been made in the books.
4. Provision for doubtful debts is to be adjusted to 5%5\% of net trade debtors.

Calculate the net amount to be charged to the Profit and Loss Account for bad and doubtful debts for the year ended 31st December 2025 (in ₦).

Answer: 38000 ₦

Answer

The net amount to be charged to the Profit and Loss Account for bad and doubtful debts is ₦38,000.
To find the net charge to the Profit and Loss Account, first update Trade Debtors by adding the dishonoured cheque (₦520,000+₦20,000=₦540,000₦520,000 + ₦20,000 = ₦540,000) and deducting the additional bad debt (₦540,000−₦40,000=₦500,000₦540,000 - ₦40,000 = ₦500,000). The required provision is 5%×₦500,000=₦25,0005\% \times ₦500,000 = ₦25,000. Comparing this with the existing provision of ₦22,000₦22,000 gives an increase of ₦3,000₦3,000. The net charge to Profit and Loss is the sum of additional bad debt (₦40,000₦40,000) plus provision increase (₦3,000₦3,000) minus bad debt recovered (₦5,000₦5,000), yielding ₦38,000₦38,000.

Step-by-Step Solution

1
Calculate the updated trade debtors balance prior to bad debt write-off
Gross Debtors = ₦520,000+₦20,000=₦540,000₦520,000 + ₦20,000 = ₦540,000
A dishonoured cheque increases the amount owed by trade debtors and must be added back to the trial balance figure.
2
Deduct additional bad debts to find net debtors subject to provision
Adjusted Trade Debtors = ₦540,000−₦40,000=₦500,000₦540,000 - ₦40,000 = ₦500,000
Additional bad debts must be written off from gross debtors before computing the new provision.
3
Compute the required new provision for doubtful debts balance
New Provision = 5%×₦500,000=₦25,0005\% \times ₦500,000 = ₦25,000
The provision rate applies to the collectible debtors balance after all bad debt adjustments.
4
Determine the net change in the provision for doubtful debts account
Increase in Provision = ₦25,000−₦22,000=₦3,000₦25,000 - ₦22,000 = ₦3,000
Since the required provision (₦25,000₦25,000) exceeds the existing provision (₦22,000₦22,000), an increase of ₦3,000₦3,000 is debited to the Profit and Loss Account.
5
Combine all bad debts items to calculate the net charge to Profit and Loss Account
Net P&L Charge = ₦40,000 (Bad Debt)+₦3,000 (Provision Increase)−₦5,000 (Bad Debt Recovered)=₦38,000₦40,000 \text{ (Bad Debt)} + ₦3,000 \text{ (Provision Increase)} - ₦5,000 \text{ (Bad Debt Recovered)} = ₦38,000
Bad debts written off and provision increases represent expenses (debits), while bad debts recovered represent revenue/credit adjustments.

Key Concept

Adjustments for bad debts, dishonoured cheques, bad debts recovered, and provision for doubtful debts in final accounts
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Topics

Adjustments for Bad Debts and Provision for Doubtful Debts

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