Final Accounts – Special transactions; Bad Debts, Closing Entries etc.

Back to: FINANCIAL ACCOUNTING SS2

 

Welcome to class! 

In today’s class, we will be talking about Final Accounts – Special transactions; Bad Debts, Closing entries etc. Enjoy the class!

Final Accounts – Special transactions; Bad Debts, Closing Entries etc.

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 GOODS WITHDRAWN BY THE OWNER FOR PERSONAL USE: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 become 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 to 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 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 of omissions, errors of principle, casting errors etc.
11. Provision for contingencies e.g. legal charges, accountancy charges. 

GENERAL EVALUATION

1. Explain the purpose of preparing each of the following  (i) trading account  (ii) profit    and loss account  (iii) balance sheet
2. List six items found in the asset and liability sides of the balance sheet of a sole trader
3. List and explain three classifications of ledger accounts
4. State ten uses of the General Journal.
5. List ten users of accounting information

 

In our next class, we will be talking about Final Accounts – Provision for Doubtful Debts.  We hope you enjoyed the class.

Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.

For more class notes, homework help, exam practice, download our App HERE

Join ClassNotes.ng Telegram Community for exclusive content and support HERE