Final Accounts – Special Transactions; Bad Debts, Closing Entries

CONTENT

• SPECIAL ITEMS OF EXPENSES/LOSSES
• BAD DEBTS RECOVERED
• CLOSING ENTRIES
• ADJUSTMENTS IN THE FINAL ACCOUNT

SPECIAL ITEMS OF EXPENSES /LOSSES

1.         GOODS STOLEN OR DESTROYED

            Goods may have been stolen (pilfered) or destroyed during the financial year.  When this occurs, the following entries will be passed

                        Dr        Profit and Loss Account

                        Cr        Purchases Account

2.         GOODS WITHDRAWN BY THE OWNER FOR PERSONAL USE

            The owner of the business can withdraw goods for his own use.  The treatment in the account is that such goods are recorded at the cost price.  The entries to be passed are;

                        Dr        Drawings Account

                        Cr        Purchases Account

3.         BAD DEBTS

            These are debts which have became irrecoverable i.e. debts that cannot be collected again from a customer.  Bad debts occur as a result of the inability of the customer to pay his debt.  This situation can arise due to a number of factors or reasons among which are the death of a customer, the insolvency, bankruptcy or liquidation of the customer, poor economic/political situation of a country, poor debt management on the part of the creditor etc.

            Accounting treatment of bad debts.

                        Dr        Bad Debts Account

                        Cr        Debtors Account

            This will reduce the value of debtors in the ledger

            The Bad Debts Account will have a debit balance and will appear among other items in the trial balance.

On the preparation of the final account

            Dr        Profit and Loss Account

            Cr        Bad Debts Account

Bad debt is thus a loss to the business organization

BAD DEBTS RECOVERED

Occasionally, a bad debt previously written off may be paid.  The accounting treatment in such a situation are:

(a)        Dr        Debtor’s  Account

            Cr        Bad Debts Recovered Account

This will bring the debtors account to its original position before the bad debts were written off

(b)        Dr        Cash /Bank Account

            Cr        Debtor’s Account

(c)        On the preparation of the final accounts

            Dr        Bad Debts Recovered Account

            Cr        Profit and Loss Account

The amount recovered is an additional income for the period.  This explains why it is being credited into the Profit and Loss Account.

EVALUATION

1.         What are the accounting entries posted whenever the owner of a business withdraws cash from the business for private use.

2.         What are the accounting entries posted whenever the owner of a business withdraws goods from the business for personal use.

CLOSING ENTRIES

Closing entries are those entries made at the end of the accounting period (e.g 31^st December,

20xx) to close the various ledger accounts and transfer their balances to the final account.

ADJUSTMENTS OF THE FINAL ACCOUNT

Adjustments are closing entries or amendments made in the books of accounts at the end of

the accounting period so as to achieve a proper matching of costs and expenses with revenue.

Adjustments are required for the following:

1.         Accruals

2.         Prepayments

3.         Depreciation of fixed assets

4.         Provision for doubtful debts

5.         Provision for discounts on debtors

6.         Bad debts

7.         Closing stock

8.         Capital and revenue items of income and expenditure.

9.         Set-offs

10.       Correction of errors e.g. errors ofomissions, errors of principle, casting errors etc.

11.       Provision for contingencies e.g. legal charges, accountancy charges.

EVALUATION

1.         Write short notes on the following

            (a) Drawings               (b) Bad debts

2.         Distinguish between closing entries and adjustments as it relates to the preparation of final accounts.

GENERAL EVALUATION

1    Explain the purpose of preparing each of the following  (i) trading account  (ii) profit    and loss account  (iii) balance sheet

• List six items found in the asset and liability sides of the balance sheet of a sole trader
• List and explain three classifications of ledger accounts
• State ten uses of the General Journal.
• List ten users of accounting information

READING ASSIGNMENT

Simplified and Amplified Financial Accounting, Page 143-150

WEEKEND ASSIGNMENT

1.         At the end of a trading period cost of goods sold is debited to the trading account while cost of services is debited to the (a) balance sheet (b) trading account (c) profit and loss account (d) manufacturing account

2.         The purchase of a typewriter for office use for N2,000 is debited to _____

            (a) creditors         (b) bank account        (c) purchases account     (d) equipment account

3.         Books of account are opened by means of a ______________ journal

            (a) purchases      (b) principal        (c) sales     (d) returns inwards

4.         Which of the following is recorded on the debit side of the Trial Balance (a) bank overdraft (b) returns outwards (c) purchases (d) capital

5.         Which of the following is not shown in the trial balance________

            (a) discounts allowed       (b) discounts received        (c) opening stock        (d) closing stock

THEORY

1.     List any eight components of Trading Account

2.(a)     List any five items that may cause adjustments in final accounts.

(b)        Outline any four factors that may make a debt to be irrecoverable.