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Difficulty: EasyAdjustments for Bad Debts and Provision for Doubtful Debts

The trial balance of Tunde Traders at 31st December 2025 showed Trade Debtors of ₦60,000₦60,000 and an existing Provision for Doubtful Debts of ₦2,500₦2,500. At year end, an additional bad debt of ₦5,000₦5,000 is to be written off, and the provision for doubtful debts is to be maintained at 5%5\% of net trade debtors. What amount will be debited to the Profit and Loss Account as the adjustment for provision for doubtful debts?

  1. ₦250₦250Answer
  2. B
    ₦2,750₦2,750
  3. C
    ₦500₦500
  4. D
    ₦3,000₦3,000

Answer

₦250₦250
Net trade debtors are calculated by deducting the bad debt written off (₦60,000−₦5,000=₦55,000₦60,000 - ₦5,000 = ₦55,000). The required provision is 5%5\% of ₦55,000=₦2,750₦55,000 = ₦2,750. Since an existing provision of ₦2,500₦2,500 is already recorded, only the net increase of ₦2,750−₦2,500=₦250₦2,750 - ₦2,500 = ₦250 is charged to the Profit and Loss Account.

Step-by-Step Solution

1
Calculate net trade debtors after writing off additional bad debt
Net Debtors = ₦60,000−₦5,000=₦55,000₦60,000 - ₦5,000 = ₦55,000
Additional bad debts must always be deducted from gross debtors before computing the required percentage provision.
2
Calculate the new required provision for doubtful debts
New Provision = 5%×₦55,000=₦2,7505\% \times ₦55,000 = ₦2,750
The provision rate of 5%5\% applies to the remaining bad-debt-adjusted balance of trade debtors.
3
Determine the net increase to be debited to the Profit and Loss Account
Increase in Provision = ₦2,750−₦2,500=₦250₦2,750 - ₦2,500 = ₦250
Only the net increase or decrease between the new provision and existing provision is transferred to the Profit and Loss Account.

Key Concept

Provision for Doubtful Debts Adjustment
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Topics

Adjustments for Bad Debts and Provision for Doubtful Debts

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