Suspense accounts and error correction are popular topics for examiners because they test understanding of bookkeeping principles so well. A suspense account is a temporary resting place for an entry that will end up somewhere else once its final destination is determined. There are two reasons why a suspense account could be opened:
Types of error
Before we look at the operation of suspense accounts in error correction, we need to think about types of error because not all types of error affect the balancing of the accounting records and hence the suspense account. Refer to Table 1.
Table 1: Types of error
Error type | Suspense account involved? | |
---|---|---|
1 Omission – a transaction is not recorded at all | No | |
2 Error of commission – an item is entered to the correct side of the wrong account (there is a debit and a credit here, so the records balance) | No | |
3 Error of principle – an item is posted to the correct side of the wrong type of account, as when cash paid for plant repairs (expense) is debited to plant account (asset) (errors of principle are really a special case of errors of commission, and once again there is a debit and a credit) | No | |
4 Error of original entry – an incorrect figure is entered in the records and then posted to the correct account Example: Cash $1,000 for plant repairs is entered as $100; plant repairs account is debited with $100 | No | |
5 Reversal of entries – the amount is correct, the accounts used are correct, but the account that should have been debited is credited and vice versa Example: Factory employees are used for plant maintenance: Correct entry: Debit: Plant maintenance Credit: Factory wages Easily done the wrong way round | No | |
6 Addition errors – figures are incorrectly added in a ledger account | Yes | |
7 Posting error a. an entry made in one record is not posted at all b. an entry in one record is incorrectly posted to another Examples: cash $10,000 entered in the cash book for the purchase of a car is: a. not posted at all b. posted to Motor cars account as $1,000 | Yes | |
8 Trial balance errors – a balance is omitted, or incorrectly extracted, in preparing the trial balance | Yes | |
9 Compensating errors – two equal and opposite errors leave the trial balance balancing (this type of error is rare, and can be because a deliberate second error has been made to force the balancing of the records or to conceal a fraud). Yes, to correct each of the errors as discovered | Yes, to correct each of the errors as discovered |
Correcting errors
Errors 1 to 5, when discovered, will be corrected by means of a journal entry between the ledger 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 the trial balance. The trial balance totals were: Debit $1,796,100 Credit $1,852,817
Nevertheless, he proceeded to prepare draft financial statements, inserting the difference as a balancing figure in the statement of financial position. The draft statement of profit or loss 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:
Required:
(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)
Note: it is unlikely that this format of question will be used in either the FA or FR exam. Both of these exams can test any of the errors included in the above question but an FA or FR exam question is unlikely to test this learning outcome using such a high concentration of marks. Despite this, the above question is still considered useful for teaching purposes.
The approach to the question should be:
Then deal with the errors in order:
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)
Suspense Account | ||||
---|---|---|---|---|
$ | $ | |||
Difference | 56,717 | Sales returns | 8,980 | |
Discount received | 919 | Purchases returns | 8,980 | |
Revenue (customer cash discounts) | 836 | |||
--- | Insurance | 580 | ||
Telephone (trial balance) | 38,260 | |||
57,636 | 57,636 | |||
Journal Entries | ||||
$ | $ | |||
1 Sales returns account | 8,980 | |||
Suspense account | 8,980 | |||
Purchases returns account | 8,980 | |||
Suspense account | 8,980 | |||
2 Plant account | 9,600 | |||
Plant repairs account | 9,600 | |||
Depreciation (statement of profit or loss) | 960 | |||
Plant depreciation account | 960 | |||
3 Revenue (customer cash discounts) | 836 | |||
Suspense account | 836 | |||
Suspense account | 919 | |||
Discount received account | 919 | |||
4 Insurance account | 580 | |||
Suspense account | 580 | |||
5 Trial balance (no ledger entry) | 38,260 | |||
Suspense account | 38,260 | |||
6 Sales account | 4,800 | |||
Motor vehicles disposal account | 4,800 | |||
Motor vehicles disposal account | 12,000 | |||
Motor vehicles asset account | 12,000 | |||
Motor vehicles depreciation account | 8,000 | |||
Motor vehicles disposal account | 8,000 | |||
Motor vehicles disposal account | 800 | |||
Statement of profit or loss | 800 |
Table 3: Answer – Part (b)
Adjustment to profit | - | + |
---|---|---|
$ | $ | |
Profit as in draft statement of profit or loss | 141,280 | |
1 Sales returns adjustment (2 x $8,980) | 17,960 | |
2 Plant: reduction in repairs | 9,600 | |
depreciation – 6/12 x 20% x $9,600 960 | 960 | |
3 Revenue (customer cash discounts) | 836 | |
Discount received | 919 | |
4 Insurance – opening balance omitted | 580 | |
5 Telephone expense omitted | 38,260 | |
6 Profit on sale of car | 800 | |
Proceeds taken out of sales | 4,800 | ----- |
63,396 | 152,599 | |
(63,396) | ||
Revised net profit | 89,203 |
Some hints on preparing suspense accounts