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Difficulty: Very hardBad Debts Written Off and Bad Debts Recovered

At 1st January 2025, Obi Stores maintained a Provision for Doubtful Debts balance of ₦42,000\text{₦}42,000. On 31st December 2025, the Total Trade Debtors balance stood at ₦960,000\text{₦}960,000 before adjustments. The following financial events occurred at year-end:

(i) A debt of ₦40,000\text{₦}40,000 owed by Okon is to be written off as irrecoverable.
(ii) A cash recovery of ₦18,000\text{₦}18,000 was received from Musa in respect of a debt previously written off in 2023. The transaction was correctly recorded in the cash book but mistakenly credited to the Bad Debts Written Off account.
(iii) Provision for doubtful debts is to be adjusted to 5%5\% of net trade debtors.

What is the net amount to be charged as an expense to the Profit and Loss Account for the year ended 31st December 2025 in respect of bad debts written off, bad debts recovered, and provision for doubtful debts?

  1. ₦26,000\text{₦}26,000 net debitAnswer
  2. B
    ₦28,000\text{₦}28,000 net debit
  3. C
    ₦62,000\text{₦}62,000 net debit
  4. D
    ₦68,000\text{₦}68,000 net debit

Answer

₦26,000\text{₦}26,000 net debit
To determine the net impact on the Profit and Loss account, bad debts written off during the year (₦40,000\text{₦}40,000) increase expenses. The net trade debtors figure becomes ₦960,000−₦40,000=₦920,000\text{₦}960,000 - \text{₦}40,000 = \text{₦}920,000. The required provision for doubtful debts is 5%×₦920,000=₦46,0005\% \times \text{₦}920,000 = \text{₦}46,000. Since the opening provision was ₦42,000\text{₦}42,000, there is an increase in provision of ₦4,000\text{₦}4,000, which is debited to P&L. Bad debts recovered of ₦18,000\text{₦}18,000 represent an income (credit to P&L). Therefore, the overall net charge to P&L is ₦40,000+₦4,000−₦18,000=₦26,000\text{₦}40,000 + \text{₦}4,000 - \text{₦}18,000 = \text{₦}26,000 net debit.

Step-by-Step Solution

1
Calculate Net Debtors balance after bad debts write-off
Net Debtors = ₦960,000−₦40,000=₦920,000\text{₦}960,000 - \text{₦}40,000 = \text{₦}920,000
Bad debts written off must be deducted from gross debtors before applying the provision percentage.
2
Determine required new provision for doubtful debts and the adjustment required
New Provision = 5%×₦920,000=₦46,0005\% \times \text{₦}920,000 = \text{₦}46,000. Increase in provision = ₦46,000−₦42,000=₦4,000\text{₦}46,000 - \text{₦}42,000 = \text{₦}4,000 (debit to P&L).
Only the net change (increase) in provision is charged to the Profit and Loss Account.
3
Calculate net Profit and Loss Account impact of all adjustments
Net P&L Charge = Bad Debts Written Off (₦40,000\text{₦}40,000 Dr) + Provision Increase (₦4,000\text{₦}4,000 Dr) - Bad Debts Recovered (₦18,000\text{₦}18,000 Cr) = ₦26,000\text{₦}26,000 net debit.
Bad debts written off and provision increases represent expenses (debits), while bad debts recovered represent revenue gain/income (credit).

Key Concept

Accounting treatment of combined Bad Debts Written Off, Bad Debts Recovered, and Provision for Doubtful Debts adjustments in final accounts.
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Topics

Bad Debts Written Off and Bad Debts Recovered

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