MODULE THREE: TRIAL BALANCE AND FINAL ACCOUNTS
3.0 The body of the Unit 3.1 Bad debts
3.1.3 Worked Examples
1. Mr O. Arobieke owed Ajike Enterprises the sum of N200,000 as at February 1, 2005, he was declared bankrupt on 28th February 2005 and his property were distributed among his creditors of which Ajike Enterprises is one. All the creditor received 75k over on the Naira on 31st October, 2005. Record the above transactions in the relevant ledger accounts of Ajike Enterprises at the end of the year 31st December, 2005.
O. Arobieke’s Account
2005 N 2005 N
Jan 1 Bal c/d 200,000 Oct 31 Bank/Cash 150,000
Dec 31 Bad debts 50,000
200,000 200,000
Bad Debt Account
2005 N 2005 N
Dec 31 O. Arobreke 50,000 Profit and Loss 50,000
Profit and Loss Account
2005 N 2005 N
Dec 31 Bad Debts 50,000
2. The Accounting year of Ajewole and Sons Enterprises runs from January to December every year. During the three years ended 31st December 2004, 2005 and 2006, the following debts were found to be irrecoverable and were subsequently written off to bad debt account on the stated dates below: N
28th February, 2004 T. Taiwo 10,000 31st May, 2004K. Kehinde 25,000
30th November, 2004 I. Idowu 15,000 31st January 2005 A. Alaba 30,000 31st July, 2005 O. Ojo 5,000 31st August 2006 Y. Yemisi 8,000 1st December, 2006 K. Kokumo 9,000
On 31st December, 2004, 2005 and 2006, the outstanding figure for total debtors from sales ledger account was N600,000, N800,000 and N500,000 respectively. It is the company’s policy to make 5% provision for doubtful debts at the end of the years.
You are required to prepare for the years 2004 to 2006.
viii. Bad debt account with provision inclusive ix. Profit and loss account (extracts)
x. Balance sheet (extracts) Solution
Ajewole and Sons Enterprises Profit and Loss Account for the year ended 31st December;
……….
Extracts
2004 N N
Dec 31 Bad Debt 80,000
2005
Dec 31 Bad debt 75,000
2006
Dec 31 Bad debt 42,000
Bad Debt Account
2004 N 2004 N
Feb 28 T. Taiwo 10,000 Dec 31 Profit and Loss 80,000
May 1 K. Kehinde 25,000
Nov. 30 I. Idowu 15,000
Dec 31 Provision for Doubtful Debt c/d 30,000
80,000 80,000
2005 2005
Jan 31 A. Alaba 30,000 Jan 1 Provision for doubtful 30,000 debts b/d
July 31 O. Ojo 5,000
Dec 31 Provision for doubtful debt c/d 40,000 Dec 31 Profit and loss 45,000
75,000 75,000
2006 2006
Aug 31 Y. Yemisi 8000 Jan 1 provision for doubtful
Debt b/d 40,000
Dec 1 K. Kokumo 9000
Dec 31 Provision for doubtful Debt c/d 25.000 Dec 31 Profit and Loss 2,000
42,000 42,000
2007
Jan 1 Provision for Doubtful
Debt b/d 25,000
Ajewole and Sons Enterprises Balance Sheet as at 31st December,….
Extracts
2004 N N
Debtors 600,000
Less provision for doubtful debt c/d
30,000
570,000 2005
Debtors 800,000
Less Provision for doubtful debt 40,000
760,000 2006
Debtors 500,000
Less provision for doubtful debt 25,000
c/d 475,000
(3) Ayoola Enterprises accounting year run from March 1 of one year to February 28 of another year. The policy of the company is to make a 4 percent provision in the aggregate debtors at the end of the year, On March 1 2003, the provision for doubtful debt stood at N25,000. During the year, T. Thomas who was a customer of the firm owing N100,000 was declared bankrupt in which only 60K per Naira was received on October 31st 2003 and P, Farok’s debt of N5000 was written off at the end of the financial year- 28th February 2004. The aggregate debtors at the end of the year stood at N500,000.
In 2004, Mr. Ojo John’s debts of N6000 was written off as bad on 31st July. The sales ledger accounts total balance stood at N700,000 as at 28th February, 2005
You are required to write up the following accounts for the two years ended.
i Bad debt account
ii Provision for bad debt account iii Profit and loss account {extracts}
iv Balance sheet {extracts}
Solution
Ayoola Enterprises Bad Debt Account
2003 N 2003 N
Oct 31 T. Thomas 40,000 Feb 28 Profit and Loss 45,000
2004
Feb. 28 P. Frank 5,000
45,000 45,000
2004 2005
July 31 Ojo John 6,000 Feb 28 Profit and Loss 6,000
Provision for Doubtful Debt Account
2004 N 2003 N
Feb 28 Profit and Loss (Dec. in prov) 5,000 Mar 1 Bal b/d 25,000
Feb 28 Bal c/d 20,000
25,000 25,000
2005 2004
Feb 28 Bal c/d 28,000 Mar 1 Bal b/d 20,000
2005
Feb 28 Profit and Loss (Increase
in provision) 8,000
28,000 28,000
2005
Mar 1 Bal b/d 28,000
Profit and Loss Account, …. (Extracts)
2004 N 2004 N
Feb 28 Bad debt 45,000 Feb 28 Provision for Bad Debt 5,000 (Decrease)
2005
Feb. 28 Bad debt 6000
28 provision for Bad debt 8000
Balance sheet as at 000 (Extracts}
2004 N N
Debtors 500,000
Less: Provision for bad Debt 20,000
480,000 2005
Debtors 700,000
Less: Provision for Bad debt 28,000
672,000 Workings:
2004 N
Previous Provision = 25,000
Feb.28 Provision 4/100 x 500,00 = 20,000
Decrease in provision = 5,000
2005
Previous Provision = 20,000
Feb. 28 provision 4/100 x 700,000 = 28,000
Increase in provision = 8,000
4.0 Conclusion
We have learnt that bad debts are irrecoverable debts from debtors. The circumstance under which bad debts could occur, the accounting enteries for bad debts were discussed and worked examples shown.
5.0 Summary
In this unit you have learnt that:
• Bad debts are debts which are irrecoverable from debtors and therefore regarded as losses to the company.
• Any of the following circumstances could lead to occurrence of bad debts:
The death of the debtor, court ruling adjudging the debtor bankrupt, the debtor may be at large.
• Recovered bad debt is a debt which had been written off as irrecoverable from the debtor but was later paid by the debtor either in full or in part.
6.0 Tutor - Marked Assignment
a. What is bad debt?
b. State the circumstances under which a bad debt can occur.
c. What is Recovered bad debt ?
d. The accounting year of Omoyeni and sons Enterprises ends on 31st December every year. During the three years ended 31st December 2005, 2006 and 2007 the following debts was known and approved to be bad and was written off as bad debts account on the stated date:
Date Debtors Name Amount (N)
May 1, 2005 S. Boulos 26,000
October 31, 2005 O. Bioye 27,000
November 31, 2006 Y. Asa 23,000
January 31 2006 Z. Fola 20,000
August 28, 2007 K. Boboye 31,000
February 312007 B.Nike 19,000
July 31 2007 F.Bayo 17,000
On 31st December 2005, 2006 and 2007 the sales ledger balances stood at N900,000, N1,000,000 and N750,000 respectively. It is the company’s policy to make 4% provision for doubtful debts at the end of the year.
You are required to prepare for the year 2005 to 2007.
i The ledger accounts of each debtor
ii Bad debts account in which provision for bad debts account is embedded
iii Profit and loss account {extracts}
iv Balance sheet {extracts}
7.0 References and other sources
Igban, R.O {2004}: Financial Accounting Made simple. Volume 1 EL - TODA Ventures Limited, Lagos State, Nigeria