Chidinma Okoro: Six Year-End Adjustments for a Sole Trader
Chidinma Okoro runs a fabrics business as a sole trader. Her draft profit for the year ended 31 December 2024 is ₦4,860,000, before the following matters are dealt with:
- Insurance of ₦360,000 was paid on 1 July 2024 for the twelve months to 30 June 2025 and charged in full to the income statement.
- Rent received of ₦480,000 was credited in full; ₦120,000 of it relates to January to March 2025.
- Wages of ₦95,000 for the last week of December 2024 were paid in January 2025 and have not been accrued.
- A delivery van costing ₦6,000,000 was bought on 1 April 2024. The policy is 25% per annum on the reducing balance, charged for the proportion of the year the asset is owned. Office equipment had a carrying amount of ₦2,400,000 at 1 January 2024 and is depreciated at 15% per annum straight line.
- Receivables of ₦1,850,000 include ₦65,000 owed by a customer declared bankrupt. The allowance for doubtful debts is to be 5% of the remaining receivables; the existing allowance is ₦70,000.
- Goods costing ₦48,000 were taken by Chidinma for home use and no entry was made.
Chidinma argues that the van was paid for in full, so a full year's depreciation should be charged, and that the bankrupt customer 'might still pay'.
1. Prepare a schedule computing the corrected profit for the year, showing the effect of each adjustment.
Read the worked answer
| ₦ | |
|---|---|
| Draft profit | 4,860,000 |
| (1) Insurance prepaid: 360,000 × 6/12 | 180,000 |
| (2) Rent received in advance | (120,000) |
| (3) Wages accrued | (95,000) |
| (4) Van: 6,000,000 × 25% × 9/12 | (1,125,000) |
| (4) Office equipment: 2,400,000 × 15% | (360,000) |
| (5) Bad debt written off | (65,000) |
| (5) Increase in allowance: 5% × 1,785,000 = 89,250, less 70,000 | (19,250) |
| (6) Goods taken by owner | 48,000 |
| Corrected profit | 3,303,750 |
The corrected profit is ₦3,303,750 - nearly ₦1.56 million below the draft.
Two points of reasoning deserve emphasis. First, the allowance is computed on receivables after the bad debt is removed: 1,850,000 − 65,000 = 1,785,000, and 5% of that is 89,250. Applying 5% to the original figure and then writing off the debt would double count it. Second, goods taken by the owner are not a sale and not an expense: the correct entry is Dr Drawings ₦48,000, Cr Purchases ₦48,000, which removes the cost from the income statement and charges it to the owner's capital. It does not go through closing inventory, because the goods never entered inventory at the year end.
2. Respond to Chidinma's two arguments, identifying the accounting concepts that govern each.
Read the worked answer
Argument 1 - 'The van was paid for in full, so charge a full year.' Payment is a cash event; depreciation is an allocation of the cost consumed in generating this period's revenue. The matching/accruals concept requires the expense to follow the period of use, not the date of payment. The van was used for nine months, so ₦1,125,000 (6,000,000 × 25% × 9/12) is charged and the remaining three months fall into 2025 and later years. Charging a full year would understate 2024 profit and overstate the depreciation charge relative to the benefit received. Conversely, charging nothing in 2024 (which some owners propose for new assets) would overstate profit and overstate the carrying amount.
Argument 2 - 'The customer might still pay.' Prudence does not permit an asset to be carried at more than its recoverable amount, and a debt from a customer already declared bankrupt has no realistic prospect of recovery. It should be written off as a bad debt. If cash later arrives, it is recognised as a recovery in the year of receipt, not retroactively. The general allowance is a separate judgement: 5% of the remaining receivables reflects the collective risk on debts not yet individually identified as bad. Charging only the movement (₦19,250) rather than the full ₦89,250 is essential - the existing ₦70,000 allowance already sits in the books.
Both adjustments also satisfy the going concern and consistency conventions: the same depreciation policy and allowance basis must be applied each year so that comparatives remain meaningful.
3. Prepare the relevant extracts from the statement of financial position at 31 December 2024, showing how each adjustment is carried forward.
Read the worked answer
| Extract | ₦ |
|---|---|
| Non-current assets | |
| Delivery van at cost 6,000,000 less accumulated depreciation 1,125,000 | 4,875,000 |
| Office equipment 2,400,000 less accumulated depreciation 360,000 | 2,040,000 |
| Current assets | |
| Trade receivables 1,785,000 less allowance 89,250 | 1,695,750 |
| Prepayments (insurance) | 180,000 |
| Current liabilities | |
| Accrued wages | 95,000 |
| Rent received in advance (deferred income) | 120,000 |
| Capital | |
| Drawings increased by goods taken (₦48,000) |
Key reasoning: the ₦180,000 insurance prepayment is a right to cover after the year end, so it is an asset, not an expense. Rent received in advance is an obligation to provide space in 2025, so it is a liability - not negative revenue. The net receivables figure shows the two-stage logic: specific write-off first, then the general allowance on what remains. The van's carrying amount reflects nine months of use, and the drawings entry reduces capital rather than appearing anywhere in the income statement.