For examination purposes we are more often concerned with the second of these - differences and error correction.
Errors 1 to 5, when discovered, will be corrected by means of a journal entry between the accounts affected. Errors 6 to 9 also require journal entries to correct them, but one side of the journal entry will be to the suspense account opened for the difference in the records. Type 8, trial balance errors, are different. As the suspense account records the difference, an entry to it is needed, because the error affects the difference. However, there is no ledger entry for the other side of the correction - the trial balance is simply amended.
An illustrative question
The bookkeeping system of Turner is not computerised, and at 30 September 20X8 the bookkeeper was unable to balance the accounts. The trial balance totals were:
Nevertheless, he proceeded to prepare draft financial statements, inserting the difference as a balancing figure in the balance sheet. The draft profit and loss account showed a profit of $141,280 for the year ended 30 September 20X8.
He then opened a suspense account for the difference and began to check through the accounting records to find the difference. He found the following errors and omissions:
- $8,980 - the total of the sales returns book for September 20X8, had been credited to the purchases returns account.
- $49,600 paid for an item of plant purchased on 1 April 20X8 had been debited to plant repairs account. The company depreciates its plant at 20% per annum on a straight line basis, with proportional depreciation in the year of purchase.
- The cash discount totals for the month of September 20X8 had not been posted to the general ledger accounts. The figures were:
Discount allowed $836
Discount received $919
- $580 insurance prepaid at 30 September 20X7 had not been brought down as an opening balance
- The balance of $38,260 on the telephone expense account had been omitted from the trial balance
- A car held as a non-current asset had been sold during the year for $4,800. The proceeds of sale were entered in the cash book but had been credited to the sales account in the general ledger. The original cost of the car $12,000, and the accumulated depreciation to date $8,000, were included in the motor vehicles account and the accumulated depreciation account. The company depreciates motor vehicles at 25% per annum on a straight line basis with proportionate depreciation in the year of purchase but none in the year of sale.
(a) Open a suspense account for the difference between the trial balance totals. Prepare the journal entries necessary to correct the errors and eliminate the balance on the suspense account. Narratives are not required. (10 marks)
(b) Draw up a statement showing the revised profit after correcting the above errors. (6 marks)
Total (16 marks)
The approach to the question should be:
- Read the requirement paragraph at the end of the question.
- Attack the question - note that narratives are not required. Begin by opening the suspense account. Which side? More debit is needed to balance the trial balance, so debit the suspense account with $56,717.
Then deal with the errors in order:
- Sales returns should have been debited to the sales returns account and they have been credited to the purchases returns account. There are two errors here - the wrong account has been used and an entry which should have been a debit has been entered as a credit. The suspense account entry must therefore be for 2 x $8,980 or $17,960.
- An error of principle - no suspense account entry. Depreciation must be adjusted.
- Items have not been posted, therefore the suspense account is involved.
- Effectively a posting error - the suspense account is again involved.
- A trial balance error must affect the suspense account - but no ledger entry.
- This one needs thought. Take it one sentence at a time. Is the suspense account involved? No, because we have an error of commission followed by some unrecorded transactions.
Attempt Part (a) of the question before studying the answer as detailed in Table 2. Let's now turn to Part (b). The most convenient format for the answer is two columns for - and +. Set them up and enter the adjustments appropriately. Which of the errors affect the profit? In fact they all do. Attempt Part (b) now before looking at the answer detailed in Table 3.
Table 2: Answer - Part (a)