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Adjustments to Final Accounts

82 questions

All types82Multiple choice43Numeric26Matching4Fill in the blank9
Question 1Question →

The electricity account of Chukwuma Enterprises showed a trial balance debit balance of ₦240,000\text{₦}240,000 for the year ended 31 December 2025. At the beginning of the year on 1 January 2025, electricity accrued was ₦18,000\text{₦}18,000 and prepaid electricity was ₦12,000\text{₦}12,000. At the end of the year on 31 December 2025, electricity accrued was ₦25,000\text{₦}25,000 while prepaid electricity was ₦15,000\text{₦}15,000. What is the total electricity expense (in ₦) to be debited to the Profit and Loss Account for the year ended 31 December 2025?

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Answer: 244000

Answer

The total electricity expense to be debited to the Profit and Loss Account is ₦244,000\text{₦}244,000.
Under accrual accounting, the expense charged for the period equals cash paid during the year plus opening prepayments minus opening accruals plus closing accruals minus closing prepayments: 240,000+12,000−18,000+25,000−15,000=₦244,000240,000 + 12,000 - 18,000 + 25,000 - 15,000 = \text{₦}244,000.

Step-by-Step Solution

1
Identify the total cash paid during the financial year.
Amount paid = ₦240,000\text{₦}240,000.
This is the starting cash outflow recorded in the trial balance.
2
Adjust for opening balances brought forward from the previous period.
Add opening prepayment of ₦12,000\text{₦}12,000 and subtract opening accrual of ₦18,000\text{₦}18,000.
Prepayments from the prior year belong to the current period's expense, whereas accruals from the prior year were already expensed in that period and paid in the current period.
3
Adjust for closing balances at the end of the current period.
Add closing accrual of ₦25,000\text{₦}25,000 and subtract closing prepayment of ₦15,000\text{₦}15,000.
Accrued expenses incurred in the current period must be added, and prepaid expenses paid for the next period must be deducted under accrual accounting concepts.
4
Calculate the net charge to the Profit and Loss Account.
240,000+12,000−18,000+25,000−15,000=₦244,000240,000 + 12,000 - 18,000 + 25,000 - 15,000 = \text{₦}244,000.
This represents the exact electricity expense incurred during the financial year 2025.

Key Concept

Accrual Accounting Adjustment for Expenses
Question 2Question →

At 31st December 2025, Chukwu Limited had a total trade debtors balance of ₦120,000. During the year, bad debts amounting to ₦8,000 were written off, and a debt of ₦3,000 previously written off was recovered in cash. What is the net amount of trade debtors (in ₦) to be presented in the Statement of Financial Position?

Show answer & explanation

Answer: 112000

Answer

112,000
The net trade debtors figure in the Statement of Financial Position is calculated by subtracting bad debts written off (₦8,000) from the gross trade debtors balance (₦120,000), giving ₦112,000. Bad debts recovered (₦3,000) are recorded as income in the Profit and Loss Account and do not affect the closing trade debtors balance.

Step-by-Step Solution

1
Identify initial trade debtors balance
Initial trade debtors = ₦120,000
This is the unadjusted trade debtors balance before accounting for bad debts written off.
2
Deduct bad debts written off
Net trade debtors = ₦120,000 - ₦8,000 = ₦112,000
Bad debts written off represent debts that are irrecoverable and must be removed from total trade receivables.
3
Analyze the impact of bad debts recovered
Net trade debtors remains ₦112,000
Bad debts recovered (₦3,000) are credited to income in the Profit and Loss Account and debited to cash/bank, so they have no effect on closing trade debtors.

Key Concept

Calculation of net trade debtors after bad debts written off and recovered
Question 3Question →

At the end of the financial year, a trader's inventory has a cost price of N45,000\text{N}45,000 and a net realizable value of N40,000\text{N}40,000. In accordance with the prudence concept, at what value should the closing stock be recorded in the final accounts?

Show answer & explanation

Answer: N40,000\text{N}40,000

Answer

The closing stock should be recorded at N40,000\text{N}40,000, which is the lower of cost and net realizable value.
Under the prudence concept and standard accounting rules (IAS 2 / SAS 4), closing stock must be recorded at the lower of cost and net realizable value. Since the net realizable value (N40,000\text{N}40,000) is lower than the cost price (N45,000\text{N}45,000), the inventory is valued at N40,000\text{N}40,000.

Step-by-Step Solution

1
Identify the given inventory values
Cost price = N45,000\text{N}45,000; Net Realizable Value (NRV) = N40,000\text{N}40,000.
Both figures are required to apply the valuation rule.
2
Apply the inventory valuation rule based on the prudence concept
Lower value = N40,000\text{N}40,000.
Accounting standards dictate that inventory must be valued at the lower of cost and net realizable value to avoid overstating assets and profit.

Key Concept

Lower of Cost and Net Realizable Value (Prudence Concept)
Estimated Time:45s
Question 4Question →

Complete the statement below regarding the double entry treatment for goods taken by the business owner for private use.

Fill in the blanks below

When a sole proprietor withdraws goods from the business for personal use, the adjustment is made at cost price by debiting the account and crediting the account.
Show answer & explanation

Answer

The transaction is recorded by debiting the Drawings account and crediting the Purchases account at cost price.
Under the double-entry system and business entity concept, goods taken by the owner for personal consumption represent drawings at cost. To reflect this, the Drawings account is debited (to record the withdrawal) and the Purchases account is credited (to reduce total purchases in the trading account).

Step-by-Step Solution

1
Identify the dual effect of goods withdrawn by the owner.
The owner's total drawings increase (reducing equity), while the total cost of goods available for sale (Purchases) decreases.
According to the entity concept, personal transactions must be kept separate from business operations.
2
Apply double-entry rules to record the adjustment.
Debit Drawings account to record the owner's withdrawal, and credit Purchases account to reduce the cost of goods bought for resale.
Goods taken for personal consumption are valued at cost price and reduce total purchases in the Trading Account.

Key Concept

Double entry bookkeeping for proprietor's drawings of stock at cost price
Estimated Time:1m 0s
Question 5Question →

Complete the statement describing the standard double-entry accounting procedure required when a bad debt previously written off is subsequently recovered.

Fill in the blanks below

To properly record the recovery of a debt previously written off as irrecoverable, the customer's account is first reinstated by debiting the debtor's personal account and crediting the account. Next, the receipt of funds is recorded by debiting the cash or bank account and crediting the account.
Show answer & explanation

Answer

The first blank is 'Bad Debts Recovered' and the second blank is 'Debtor's' (or 'Trade Debtors').
When a debt previously written off is recovered, standard double-entry accounting mandates a two-stage entry: first, reinstate the debt by debiting the Debtor's Personal Account and crediting the Bad Debts Recovered Account; second, record payment by debiting Cash/Bank Account and crediting the Debtor's Personal Account.

Step-by-Step Solution

1
Identify the entry needed to reinstate the debtor's personal account balance.
Debit the Debtor's Personal Account and credit the Bad Debts Recovered Account.
Reinstating the debtor's account ensures complete ledger history for credit rating and audit purposes before settling the account.
2
Record the receipt of cash/cheque from the debtor.
Debit Cash/Bank Account and credit the Debtor's Personal Account.
Receiving cash increases cash assets and clears the reinstated personal balance of the debtor.

Key Concept

Accounting entry for bad debts recovered requires reinstating the debtor's account first before crediting the receipt of cash to the debtor's account.
Estimated Time:1m 30s
Question 6Question →

Tayo Traders had a trade debtors balance of ₦450,000\text{₦}450,000 before year-end adjustments for the financial year ended 31st December 2024. At the end of the year, additional unrecorded bad debts of ₦15,000\text{₦}15,000 were identified to be written off. During the same year, cash of ₦10,000\text{₦}10,000 was received from a customer whose debt of ₦10,000\text{₦}10,000 had been written off in 2022. What is the net trade debtors balance to be shown in the Statement of Financial Position as at 31st December 2024?

Show answer & explanation

Answer: 435000

Answer

The net trade debtors balance to be shown in the Statement of Financial Position at 31st December 2024 is ₦435,000\text{₦}435,000.
To calculate the net trade debtors figure for the Statement of Financial Position, only additional bad debts written off at year-end (₦15,000\text{₦}15,000) are deducted from the unadjusted trade debtors balance of ₦450,000\text{₦}450,000, resulting in ₦435,000\text{₦}435,000. Bad debts recovered (₦10,000\text{₦}10,000) are recognized as revenue in the Income Statement and received in cash, having no effect on closing trade debtors.

Step-by-Step Solution

1
Determine the unadjusted trade debtors balance
Unadjusted Trade Debtors = ₦450,000\text{₦}450,000
This represents the recorded receivables prior to writing off year-end unrecorded bad debts.
2
Subtract additional bad debts written off at year-end
Adjusted Trade Debtors = ₦450,000−₦15,000=₦435,000\text{₦}450,000 - \text{₦}15,000 = \text{₦}435,000
Bad debts written off represent irrecoverable amounts and must be deducted directly from trade debtors.
3
Evaluate the treatment of bad debts recovered
Effect on Trade Debtors = ₦0\text{₦}0
Bad debts recovered during the year are recorded by debiting Cash/Bank and crediting Bad Debts Recovered (an income account). Because the original personal account of the debtor was already cleared when written off in a previous period, recovery does not alter the closing trade debtors balance.

Key Concept

Treatment of Bad Debts Written Off and Bad Debts Recovered on the Statement of Financial Position
Estimated Time:1m 30s
Question 7Question →

A business started the year on 1 January 2024 with a prepaid rent balance of ₦15,000. During the year ended 31 December 2024, the total rent paid by cash was ₦120,000, which included ₦18,000 paid in advance for 2025. Additionally, rent of ₦5,000 for December 2024 was owing at the end of the year. What is the amount to be charged as rent expense in the Profit and Loss Account for the year ended 31 December 2024?

Show answer & explanation

Answer: ₦122,000

Answer

₦122,000
Under the accrual and matching concepts, expenses recognized in profit and loss must reflect what was incurred for that specific financial year. Starting with cash paid of ₦120,000, adding opening prepayment (₦15,000), deducting closing prepayment (₦18,000), and adding closing accrual (₦5,000) yields ₦122,000.

Step-by-Step Solution

1
Identify total cash paid during the period.
Cash paid = ₦120,000
This is the initial cash outflow for rent recorded in the cash book.
2
Adjust for opening and closing prepayments.
₦120,000 + ₦15,000 (opening prepaid) - ₦18,000 (closing prepaid) = ₦117,000
Opening prepayment relates to the current year and is added, while closing prepayment relates to the next year and is deducted.
3
Adjust for closing accrued expense.
₦117,000 + ₦5,000 (closing accrued) = ₦122,000
Accrued rent incurred during the period must be added to reflect the total expense incurred for the year under the matching concept.

Key Concept

Accruals and Prepayments Matching Principle
Estimated Time:1m 30s
Question 8Question →

During the financial year ended 31 December 2025, a business received ₦120,000₦120,000 cash for rent. At the end of the year, ₦20,000₦20,000 of this amount represented rent received in advance for the following year. What amount should be credited to the Profit and Loss Account as rent income for the year?

Show answer & explanation

Answer: ₦100,000

Answer

₦100,000
Under the accrual/matching concept, only income earned for the current accounting year should be credited to the Profit and Loss Account. Rent received in advance (₦20,000₦20,000) belongs to the next financial period and must be deducted from the total cash received (₦120,000₦120,000), yielding ₦100,000₦100,000.

Step-by-Step Solution

1
Identify total cash received for rent during the accounting period
Cash received = ₦120,000₦120,000
This is the total amount recorded in the cash book for rent.
2
Deduct prepaid income (rent received in advance) at year-end
₦120,000−₦20,000=₦100,000₦120,000 - ₦20,000 = ₦100,000
According to the accrual concept, income received relating to future periods must be excluded from the current period's Profit and Loss Account.

Key Concept

Accounting for Prepaid Income in Final Accounts
Estimated Time:45s
Question 9Question →

At 1 January 2025, a business had commission income accrued of ₦6,000₦6,000. During the year ended 31 December 2025, total cash received for commission was ₦85,000₦85,000. On 31 December 2025, commission accrued was ₦10,000₦10,000 while commission received in advance was ₦4,000₦4,000. What is the amount of commission income to be credited to the Profit and Loss Account for the year ended 31 December 2025?

Show answer & explanation

Answer: ₦89,000₦89,000

Answer

The amount to be credited to the Profit and Loss Account for commission income is ���89,000���89,000.
To determine the true income belonging to the financial year under the accrual concept, start with total cash received (₦85,000₦85,000), deduct opening accrued income (₦6,000₦6,000) as it relates to the prior period, add closing accrued income (₦10,000₦10,000) earned in the current period, and deduct closing prepaid income (₦4,000₦4,000) received for the future period: ₦85,000−₦6,000+₦10,000−₦4,000=₦89,000₦85,000 - ₦6,000 + ₦10,000 - ₦4,000 = ₦89,000.

Step-by-Step Solution

1
Identify the base cash received for commission income during the accounting period.
Cash received = ₦85,000₦85,000.
Cash received represents the starting total cash inflow for the period.
2
Adjust for opening accrued income from the previous period.
Cash received less opening accrued = ₦85,000−₦6,000=₦79,000₦85,000 - ₦6,000 = ₦79,000.
Opening accrued income was earned in the previous year but received in the current year, so it must be excluded.
3
Add closing accrued income and subtract closing prepaid income.
Income credited to Profit and Loss Account = ₦79,000+₦10,000−₦4,000=₦89,000₦79,000 + ₦10,000 - ₦4,000 = ₦89,000.
Closing accrued income was earned in the current year and must be included, whereas closing prepaid income relates to the next financial year and must be deducted.

Key Concept

Accruals and prepayments adjustments for income accounts in final accounts
Question 10Question →

Ade & Sons purchased a delivery van on 1 April 2023 for ₦2,000,000₦2,000,000. The firm depreciates its motor vehicles using the reducing balance method at the rate of 20%20\% per annum. The financial year of the business ends on 31 December each year. What is the total accumulated depreciation on the delivery van as of 31 December 2024?

Show answer & explanation

Answer: 640000

Answer

The total accumulated depreciation as of 31 December 2024 is ₦640,000.
For the financial year ended 31 December 2023, the van was used for 9 months (April 1 to December 31). Depreciation for 2023 is 20%×₦2,000,000×912=₦300,00020\% \times ₦2,000,000 \times \frac{9}{12} = ₦300,000. The net book value as of 31 December 2023 becomes ₦2,000,000−₦300,000=₦1,700,000₦2,000,000 - ₦300,000 = ₦1,700,000. For 2024, depreciation using the reducing balance method is 20%×₦1,700,000=₦340,00020\% \times ₦1,700,000 = ₦340,000. The total accumulated depreciation as of 31 December 2024 is the sum of both years' depreciation charges: ₦300,000+₦340,000=₦640,000₦300,000 + ₦340,000 = ₦640,000.

Step-by-Step Solution

1
Determine the time proportion and calculate depreciation for the first year (2023)
₦300,000
The asset was bought on 1 April 2023, so depreciation is charged for only 9 months in 2023: 20%×₦2,000,000×912=₦300,00020\% \times ₦2,000,000 \times \frac{9}{12} = ₦300,000.
2
Calculate net book value (NBV) at the end of 2023
₦1,700,000
Under reducing balance method, future depreciation applies to the net book value (₦2,000,000−₦300,000=₦1,700,000₦2,000,000 - ₦300,000 = ₦1,700,000).
3
Calculate depreciation for the second year (2024)
���340,000
Depreciation for a full year on reducing balance: 20%×₦1,700,000=₦340,00020\% \times ₦1,700,000 = ₦340,000.
4
Sum depreciation for both years to get accumulated depreciation at 31 December 2024
₦640,000
Accumulated depreciation is the aggregate of all yearly depreciation charges (₦300,000+₦340,000=₦640,000₦300,000 + ₦340,000 = ₦640,000).

Key Concept

Reducing balance depreciation method with proportionate mid-year calculation
Question 11Question →

On 1 July 2023, Apex Logistics purchased a industrial generator for ₦1,800,000₦1,800,000. Additional installation costs of ₦200,000₦200,000 were incurred and paid on the same day. The business prepares its financial statements annually on 31 December. If depreciation is provided at 20%20\% per annum using the straight-line method, what is the net book value of the generator as at 31 December 2024?

Show answer & explanation

Answer: ₦1,400,000₦1,400,000

Answer

The net book value of the generator as at 31 December 2024 is ₦1,400,000₦1,400,000.
The total cost of the asset includes both purchase price (₦1,800,000₦1,800,000) and installation cost (₦2,000,000₦2,000,000 total). Straight-line depreciation yields an annual rate of ₦400,000₦400,000. For 2023, 6 months of depreciation equals ₦200,000₦200,000. For 2024, a full year's depreciation is ₦400,000₦400,000. Total accumulated depreciation is ₦600,000₦600,000, leaving a net book value of ₦1,400,000₦1,400,000.

Step-by-Step Solution

1
Determine total capitalized cost of asset
Total Cost=₦1,800,000+₦200,000=₦2,000,000\text{Total Cost} = ₦1,800,000 + ₦200,000 = ₦2,000,000
Capital expenditure necessary to bring the fixed asset into usable condition (installation cost) must be added to the purchase price.
2
Calculate full annual depreciation charge
Annual Depreciation=20%×₦2,000,000=₦400,000\text{Annual Depreciation} = 20\% \times ₦2,000,000 = ₦400,000
Under the straight-line method, depreciation is computed as a fixed percentage of total historical cost.
3
Calculate prorated depreciation for the year 2023 (1 July to 31 December = 6 months)
Depreciation2023=₦400,000×612=��200,000\text{Depreciation}_{2023} = ₦400,000 \times \frac{6}{12} = ��200,000
Assets acquired during the accounting year generate depreciation expense proportional to the number of months owned.
4
Calculate depreciation for the year 2024 (1 full year)
Depreciation2024=₦400,000\text{Depreciation}_{2024} = ₦400,000
The generator was held for the entire 12-month accounting period in 2024.
5
Calculate net book value at 31 December 2024
Net Book Value=₦2,000,000−(₦200,000+₦400,000)=₦1,400,000\text{Net Book Value} = ₦2,000,000 - (₦200,000 + ₦400,000) = ₦1,400,000
Net book value equals total cost minus total accumulated depreciation.

Key Concept

Straight-line depreciation with mid-year acquisition and capital expenditure capitalization
Question 12Question →

Match each accounting transaction or balance related to depreciation on the left with its correct accounting treatment or entry on the right.

Click a left item, then click its matching right item

Items

Annual depreciation charge for the financial year
Transfer of accumulated depreciation upon sale of a fixed asset
Presentation of accumulated depreciation at year-end
Purchase of a new non-current asset on credit

Matches

Show answer & explanation

Answer

Annual depreciation charge matches with 'Debit Profit and Loss Account, Credit Provision for Depreciation Account'; Transfer of accumulated depreciation upon sale matches with 'Debit Provision for Depreciation Account, Credit Asset Disposal Account'; Presentation of accumulated depreciation at year-end matches with 'Deducted from non-current asset cost in the Statement of Financial Position'; Purchase of a new non-current asset matches with 'Debit Asset Account, Credit Payable / Supplier Account'.
Each item correctly matches its double-entry posting rule or financial statement reporting format: annual depreciation expense is debited to Profit & Loss and credited to Provision for Depreciation; asset disposal requires transferring accumulated depreciation to Asset Disposal via debiting Provision for Depreciation; the accumulated provision balance is subtracted from asset cost in the Statement of Financial Position; and asset acquisition increases asset cost by debiting the asset account.

Step-by-Step Solution

1
Determine double entry for periodic depreciation expense
Debit Profit and Loss Account and Credit Provision for Depreciation Account
Depreciation is an expense reducing net profit for the period while building up the contra-asset provision account balance.
2
Determine double entry for eliminating accumulated depreciation on disposal
Debit Provision for Depreciation Account and Credit Asset Disposal Account
To close out accumulated depreciation corresponding specifically to the asset being disposed of, debit the provision account.
3
Determine balance sheet reporting for accumulated provision
Deducted from non-current asset cost in the Statement of Financial Position
Provision for depreciation is a contra-asset account presented as a deduction from historical cost to reflect the net book value.
4
Determine double entry for capital expenditure acquisition on credit
Debit Asset Account and Credit Payable / Supplier Account
Capital purchases increase the non-current asset balance and create a corresponding creditor/payable entry.

Key Concept

Accounting Treatment of Depreciation and Provision for Depreciation
Question 13Question →

The trial balance of standard trading enterprise extracts as at 31st December 2025 showed Trade Debtors of ₦120,000\text{₦}120,000, Provision for Doubtful Debts of ₦6,000\text{₦}6,000, and Provision for Discount on Debtors of ₦1,800\text{₦}1,800.

Additional adjustments at year-end state:
1. Further bad debts of ₦5,000\text{₦}5,000 are to be written off.
2. Provision for doubtful debts is to be adjusted to 5%5\% of trade debtors.
3. Provision for discount on debtors is to be created at 2%2\% of net debtors.

What is the net amount to be charged to the Profit and Loss Account for provision for discount on debtors for the year ended 31st December 2025?

Show answer & explanation

Answer: ₦385

Answer

The net amount to be charged to the Profit and Loss Account is ₦385.
To find the correct charge to the Profit and Loss Account, unrecorded bad debts of ₦5,000 are first deducted from gross debtors of ₦120,000 to get ₦115,000. Next, the new provision for doubtful debts (5% of ₦115,000 = ₦5,750) is deducted to yield net recoverable debtors of ₦109,250. The 2% provision for discount on debtors is then calculated on ₦109,250, giving ₦2,185. Finally, subtracting the existing provision of ₦1,800 leaves an increase of ₦385 to be charged to the Profit and Loss Account.

Step-by-Step Solution

1
Calculate the adjusted trade debtors after writing off additional bad debts.
₦120,000−₦5,000=₦115,000\text{₦}120,000 - \text{₦}5,000 = \text{₦}115,000
Unrecorded bad debts must be removed from gross trade debtors first.
2
Calculate the new provision for doubtful debts at 5%.
5%×₦115,000=₦5,7505\% \times \text{₦}115,000 = \text{₦}5,750
Provision for doubtful debts is calculated on trade debtors after writing off bad debts.
3
Calculate net debtors eligible for cash discount.
\text{₦}115,000 - \text{₦}5,750 = \text{₦}109,250
Provision for discount on debtors must be computed ONLY on the net debtors expected to pay (after deducting provision for doubtful debts).
4
Compute the required new provision for discount on debtors at 2%.
2%×₦109,250=₦2,1852\% \times \text{₦}109,250 = \text{₦}2,185
This represents the total provision required in the Statement of Financial Position at year end.
5
Calculate the adjustment amount to be charged to the Profit and Loss Account.
\text{��}2,185 - \text{₦}1,800 = \text{₦}385
Only the increase over the existing provision balance of ₦1,800 is charged as an expense to the Profit and Loss Account.

Key Concept

Calculation and accounting sequence for provision for discount on debtors
Estimated Time:2m 0s
Question 14Question →

A firm purchased motor vehicles costing ₦2,000,000₦2,000,000. As of 1 January 2024, the accumulated provision for depreciation on the vehicles was ₦400,000₦400,000. The business provides for depreciation at 20%20\% per annum using the reducing balance method. What is the correct double entry to record the annual depreciation expense for the year ended 31 December 2024?

Show answer & explanation

Answer: Debit Profit and Loss Account ₦320,000₦320,000; Credit Provision for Depreciation Account ₦320,000₦320,000

Answer

Debit Profit and Loss Account ₦320,000₦320,000 and Credit Provision for Depreciation Account ₦320,000₦320,000.
To record depreciation, the net book value at the beginning of the period (₦2,000,000−₦400,000=₦1,600,000₦2,000,000 - ₦400,000 = ₦1,600,000) must be multiplied by the depreciation rate of 20%20\%, giving ₦320,000₦320,000. The accounting entry requires debiting the Profit and Loss Account (to charge the expense) and crediting the Provision for Depreciation Account (to accumulate total depreciation).

Step-by-Step Solution

1
Calculate the Net Book Value (NBV) of the motor vehicles at the start of the year.
NBV=Cost−Accumulated Depreciation=₦2,000,000−₦400,000=₦1,600,000\text{NBV} = \text{Cost} - \text{Accumulated Depreciation} = ₦2,000,000 - ₦400,000 = ₦1,600,000.
Under the reducing balance method, depreciation is calculated on the net book value, not on original cost.
2
Compute the depreciation charge for the year ended 31 December 2024.
Depreciation Charge=20%×₦1,600,000=₦320,000\text{Depreciation Charge} = 20\% \times ₦1,600,000 = ₦320,000.
Applying the 20%20\% annual rate to the starting net book value yields the current year's expense.
3
Determine the correct double entry posting.
Debit Profit and Loss Account with ₦320,000₦320,000 and Credit Provision for Depreciation Account with ₦320,000₦320,000.
Depreciation is an expense charged to Profit and Loss, and the accumulated provision for depreciation account is increased by crediting it.

Key Concept

Accounting Treatment of Depreciation under Reducing Balance Method
Question 15Question →

On 1st January 2021, Akins Commercial Enterprises purchased plant machinery for ₦4,000,000. Depreciation is charged at a rate of 20% per annum using the reducing balance method. What is the net book value of the machinery to be reported in the Statement of Financial Position as at 31st December 2023?

Show answer & explanation

Answer: ₦2,048,000

Answer

₦2,048,000
Under the reducing balance method, depreciation is computed on the net book value at the start of each accounting period. After deducting ₦800,000 in 2021, ₦640,000 in 2022, and ₦512,000 in 2023, total accumulated depreciation reaches ₦1,952,000. Subtracting this accumulated provision from the ₦4,000,000 historical cost leaves a net book value of ₦2,048,000 as at 31st December 2023.

Step-by-Step Solution

1
Calculate depreciation for Year 1 (2021)
Depreciation for 2021 = 20% of ₦4,000,000 = ₦800,000. Net Book Value at 31/12/2021 = ₦4,000,000 - ₦800,000 = ₦3,200,000.
In Year 1, reducing balance depreciation is calculated on original cost.
2
Calculate depreciation for Year 2 (2022)
Depreciation for 2022 = 20% of ₦3,200,000 = ₦640,000. Net Book Value at 31/12/2022 = ₦3,200,000 - ₦640,000 = ₦2,560,000.
Reducing balance method applies the percentage rate to the carrying amount (net book value) at the beginning of the period.
3
Calculate depreciation for Year 3 (2023)
Depreciation for 2023 = 20% of ₦2,560,000 = ₦512,000.
Apply the 20% rate to the net book value at the start of 2023.
4
Compute total accumulated depreciation and net book value as at 31st December 2023
Total Accumulated Depreciation = ₦800,000 + ₦640,000 + ₦512,000 = ₦1,952,000. Net Book Value at 31/12/2023 = ₦4,000,000 - ₦1,952,000 = ₦2,048,000.
Net Book Value equals historical cost minus total accumulated depreciation to date.

Key Concept

Accounting Treatment of Reducing Balance Depreciation
Question 16Question →

During the financial year ended 31 December 2025, a business received ₦85,000₦85,000 cash as interest on investments. At the end of the year, ₦10,000₦10,000 of this amount was determined to be received in advance for the following financial year. What is the amount of interest income to be credited to the Profit and Loss Account for the year?

Show answer & explanation

Answer: ₦75,000₦75,000

Answer

₦75,000₦75,000
Under the accrual concept of accounting, only income earned in the current financial period should be credited to the Profit and Loss Account. Since ₦10,000₦10,000 of the ₦85,000₦85,000 cash received relates to the next period, it must be subtracted to leave ₦75,000₦75,000 as the earned income for the year.

Step-by-Step Solution

1
Identify total cash received for interest during the period
Total cash received = ₦85,000₦85,000
This represents the starting cash movement for interest income.
2
Deduct closing prepaid income (received in advance)
Earned Interest Income = ₦85,000−₦10,000=₦75,000₦85,000 - ₦10,000 = ₦75,000
According to the accrual concept, revenue received in advance for future periods must be excluded from the current year's Profit and Loss Account.

Key Concept

Adjustment for Prepaid Income in the Profit and Loss Account
Estimated Time:45s
Question 17Question →

During the financial year, a business received ₦75,000₦75,000 cash for rent income. At the end of the financial year, ₦15,000₦15,000 of this amount represented rent received in advance for the following year. What is the total amount of rent income (in ₦₦) to be credited to the Profit and Loss Account for the year?

Show answer & explanation

Answer: 60000

Answer

The total amount of rent income to be credited to the Profit and Loss Account for the year is ₦60,000₦60,000.
To calculate the rent income earned during the financial period, closing prepaid rent income is subtracted from the total cash received (₦75,000−₦15,000=₦60,000₦75,000 - ₦15,000 = ₦60,000).

Step-by-Step Solution

1
Identify cash received during the year
Cash received = ₦75,000₦75,000
This represents total cash inflows recorded for rent during the financial period.
2
Deduct closing prepaid income
Income for P&L = ₦75,000−₦15,000=₦60,000₦75,000 - ₦15,000 = ₦60,000
According to the accrual concept, income received in advance relates to the subsequent accounting period and must be deducted from the current year's Profit and Loss Account.

Key Concept

Adjustment for Prepaid Income in Final Accounts
Question 18Question →

On 31st December 2025, a business trial balance showed Trade Debtors of ₦52,000\text{₦}52,000 and an existing Provision for Doubtful Debts of ₦1,800\text{₦}1,800. Before preparing final accounts, an additional bad debt of ₦2,000\text{₦}2,000 is written off, and the provision for doubtful debts is to be adjusted to 5%5\% of the remaining trade debtors. What amount will be charged to the Profit and Loss Account for the provision for doubtful debts?

Show answer & explanation

Answer: ₦700

Answer

₦700
The correct charge to the Profit and Loss Account is ₦700. First, the additional bad debt of ₦2,000 must be deducted from the gross trade debtors of ₦52,000 to leave net debtors of ₦50,000. Calculating 5% on ₦50,000 gives a new provision balance of ₦2,500. Since an existing provision of ₦1,800 is already in place, only the increase of ₦700 (₦2,500 - ₦1,800) is recognized as an expense in the Profit and Loss Account.

Step-by-Step Solution

1
Deduct additional bad debts from gross trade debtors to obtain net debtors.
Net Debtors=₦52,000−₦2,000=₦50,000\text{Net Debtors} = \text{₦}52,000 - \text{₦}2,000 = \text{₦}50,000
Provision for doubtful debts is calculated only on receivables after all bad debts have been written off.
2
Calculate the required new provision for doubtful debts.
New Provision=5%×₦50,000=₦2,500\text{New Provision} = 5\% \times \text{₦}50,000 = \text{₦}2,500
The policy requires creating a 5% reserve on remaining collectable receivables.
3
Calculate the net increase in provision to be charged to Profit and Loss.
\text{Charge to P&L} = \text{₦}2,500 - \text{₦}1,800 = \text{₦}700
Only the incremental increase in provision represents an expense for the current accounting period.

Key Concept

Adjustment of Provision for Doubtful Debts
Estimated Time:1m 30s
Question 19Question →

During the financial year ended 31 December 2025, a business paid ₦50,000\text{₦}50,000 for insurance. On 31 December 2025, it was determined that ₦10,000\text{₦}10,000 of this amount was paid in advance for the following year. What is the net amount to be charged to the Profit and Loss Account for insurance for the year ended 31 December 2025?

Show answer & explanation

Answer: ₦40,000\text{₦}40,000

Answer

The net amount to be charged to the Profit and Loss Account is ₦40,000\text{₦}40,000.
Under the accruals concept, only expenses relating to the current accounting period are charged to the Profit and Loss Account. Subtracting the prepaid amount of ₦10,000\text{₦}10,000 from the total payment of ₦50,000\text{₦}50,000 gives the correct charge of ₦40,000\text{₦}40,000.

Step-by-Step Solution

1
Identify total insurance paid during the year
Total payment = ₦50,000\text{₦}50,000
This is the initial cash outlay recorded in the cash book.
2
Deduct prepaid insurance for the next accounting period
Profit and Loss charge = ₦50,000−₦10,000=₦40,000\text{₦}50,000 - \text{₦}10,000 = \text{₦}40,000
According to the accrual concept, expenses paid in advance for a future period must be excluded from current year expenses.

Key Concept

Prepaid expenses adjustment in final accounts
Question 20Question →

Bello & Sons Traders purchased industrial equipment for ₦5,000,000 on 1 January 2023. Depreciation is charged at a rate of 20% per annum using the reducing balance method. Which of the following represents the correct accounting journal entry to record the depreciation expense for the financial year ended 31 December 2025?

Show answer & explanation

Answer: Debit Profit and Loss Account ₦640,000; Credit Provision for Depreciation Account ₦640,000

Answer

Debit Profit and Loss Account ₦640,000; Credit Provision for Depreciation Account ₦640,000
The correct answer correctly determines the third-year depreciation under the reducing balance method. The Net Book Value at the beginning of 2025 is ₦3,200,000 (Cost of ₦5,000,000 less ₦1,000,000 for 2023 and ₦800,000 for 2024). Taking 20% of ₦3,200,000 yields ₦640,000. In accordance with double-entry principles, annual depreciation is charged by debiting the Profit and Loss Account (an expense) and crediting the Provision for Depreciation Account.

Step-by-Step Solution

1
Calculate depreciation for Year 1 (2023)
Depreciation for 2023 = 20% of ₦5,000,000 = ₦1,000,000. Net Book Value (NBV) at 31 Dec 2023 = ₦5,000,000 - ₦1,000,000 = ₦4,000,000.
Under the reducing balance method, annual depreciation is calculated as a fixed percentage of the carrying value (cost less accumulated depreciation).
2
Calculate depreciation for Year 2 (2024)
Depreciation for 2024 = 20% of ₦4,000,000 = ₦800,000. Accumulated depreciation at 31 Dec 2024 = ₦1,000,000 + ₦800,000 = ₦1,800,000. NBV at 31 Dec 2024 = ₦5,000,000 - ₦1,800,000 = ₦3,200,000.
The carrying value must be updated at the end of each period by deducting cumulative depreciation.
3
Calculate depreciation for Year 3 (2025)
Depreciation for 2025 = 20% of ₦3,200,000 = ₦640,000.
The depreciation charge for 2025 is 20% of the opening Net Book Value for 2025.
4
Formulate the accounting journal entry
Debit Profit and Loss Account ₦640,000; Credit Provision for Depreciation Account ₦640,000.
Depreciation is an operating expense (debit Profit & Loss) that increases the cumulative allowance account (credit Provision for Depreciation).

Key Concept

Accounting Treatment of Reducing Balance Depreciation and Journal Entries
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