Suspense Accounts and Errors Correction

Introduction 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: 1. a bookkeeper is unsure where to post an item and enters it to a suspense account pending instructions 2. there is a difference in a trial balance and a suspense account is opened with the amount of the difference so that the trial balance agrees (pending the discovery and correction of the errors causing the difference). This is the only time an entry is made in the records without a corresponding entry elsewhere ( ee e!hibit A). "hen the trial balance does not agree# the amount of the difference is entered in a suspense account. Exhibit A
Trial Balance as on 31 December 2005 $r. & 1''#''' 1''#''' %r. & ((#()' *' 1''#'''

Total after all the accounts have been listed uspense account

T pes o! Errors There are two types of errors: (i) +rrors not affecting Trial ,alance Agreement (i.e. total debit - total credit) (ii) +rrors affecting Trial ,alance Agreement (i.e total debit . total credit or total debit / total credit) Treatment: The difference is temporaril entered into 0suspense account1 .

Exhibit B" T pes o! errors

2dentify the following errors whether they affect the trial balance agreement or not. Error t pe Suspense account in#ol#ed$ 1 Error o! %mission 3 a transaction is not recorded at all 2 Error o! commission 3 an item is entered to the correct side of the wrong account (there is a debit and a credit here# so the records balance) +!ample: 5. 6uen paid us by che7ue &1''# correctly entered in the cash book# but it entered wrongly into the account of 5. 6ee. 3 Error o! principle 3 an item is posted to the correct side of the wrong type (nature) of account +!ample: when cash paid for plant repairs (e!pense) 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) & Error o! ori'inal entr 3 an incorrect figure is entered in the records and then posted to the correct account +!ample: %ash 89&1#''' for plant repairs is entered as 89&1'': plant repairs account is debited with 89&1'' 5 Complete (e#ersal o! entries 3 the amount is correct# the accounts used are correct# but the account that should have been debited is credited and vice versa +!ample: "e paid che7ue of &2'' on 2' ;ay 2''< to $.%han. $ebit: ,ank %redit: $. %han 4o 4o 4o 4o 4o

) Compensatin' errors 3 two e7ual and opposite errors leave the trial balance balancing. (this case is rare) +!ample: 5urchases and ales were overstated by &1''. * Addition errors 3 figures are incorrectly added in a ledger account e.g. overcast or undercast + ,ostin' error 3 a) debit but no credit: credit but no debit b) enter a different amount on the debit side from the amount on the credit side. +!ample: cash 89&1'#''' entered in the cash book for the purchase of a car is: a) posted to ;otor cars account as 89&1#''' only# no posted to cash book - Trial balance errors 3 a balance is omitted# posting an amount incorrectly# or posting a balance to wrong side of the trial balance Correctin' errors (2) 3 uspense account not involved

4o

=es =es

=es

+rrors 1 to )# when discovered# will be corrected by means of a >ournal entries between the accounts affected.
T pes o! errors 1 5urchases & 2<' 2<' 1'' 1'' <#<'' <#<'' &

T. 8ung 5urchase of &2<' was omitted# now corrected. 2 5. 6ee 5. 6uen 5urchases entered in wrong personal account# now corrected ? 5lant repairs 5lant @epairs of 5lant were wrongly entered to 5lant account# now corrected.

* 5lant repairs %ash 5ayment of &1#''' incorrectly entered as &1''# now corrected.

('' ('' *'' *'' 1'' 1''

< $. %han ,ank 5ayment of &2'' to $. %han incorrectly credited to his account# and debited to bank. +rror now corrected ) ales 5urchases ales and purchases accounts were overcast by &1''# now corrected.

* For public examinations, narrations are usually not required for this topic.

%lasswork 1. how the >ournal entries necessary to correct the following errors: (4arrations are not re7uired) (i) A sale of goods &)AB to 8. 6uen had been entered in 8. 6uiCs account. (ii) The purchase of a machine on credit from 6. 5o for &*#?(' had been completely omitted from our books. (iii) The purchase of a motor van &?#B'' had been entered in error in the motor e!penses account. (iv) A sale of &221 to %. Dat had been entered in the books# both debit and credit as &212. (v) %ommission received &2<A had been entered in error in the sales account.

%orrecting +rrors (22) 3 uspense account involved +rrors A to B also re7uire >ournal entries to correct them. Ene side of the >ournal entry will be entered to the suspense account opened for the difference in the records. +rror (# trial balance errorsF are different. As the suspense account records the difference# an entry to it is needed# because the error affects the difference. 8owever# there is no ledger entry for the other side of the correction. Enly single entry is needed.

Types of errors B B

+!amples

%orrecting >ournal entries &

A credit sale of &1<' to ;r. %han has been omitted from his account. A sale to %. 6ee for &2<' was correctly entered in the sales book but entered in %. 6eeCs account as &<2'. A credit sale of &1'' has been credited to 8. %heungCs account ales day book was overcast by &2'' ales account was undercast by &*' The total of the sales account of &1#<'' has been omitted from the trial balance The total of the sales account of &1#<'' has been e!tracted as &1#2'' in the trial balance. The total of the sales account of &1#<'' has been e!tracted to the debit column of the trial balance

$r. ;r. %han %r. uspense $r. uspense %r. %. 6ee $r. 8. %heung %r. uspense $r ales %r uspense $r uspense %r ales $r uspense $r. uspense $r uspense (&1#<'' ! 2)

1<' 1<' 2A' 2A' 2'' 2'' 2'' 2'' *' *' 1#<'' ?'' ?#'''

B A A ( ( (

.or /0CEE examinations1 it o!ten re2uires ou to do the !ollo3in' 3 thin's" Sho3 the 4ournal entries to correct the errors Dra3 up the suspense account Sho3 the calculation o! the o! the corrected net pro!it

An illustrati#e example 5in#ol#in' errors 1 6-7 The bookFkeeper of == 6imited e!tracted a trial balance on ?1 $ecember 2'') which failed to agree by &??'# a shortage on the credit side of the trial balance. A suspense account was opened for the difference. 2n Ganuary 2''A the following errors made in 2'') were found: (a) ales day book had been undercast by &1''. (b) ales of &2<' to 9. 8ou had been debited in error to 9. 8ungCs account. (c) @ent account had been undercast by &A'. (d) $iscounts received account had been undercast &?''. (e) The sale of motor vehicle at book value had been credited in error to sales account &?)'. (i) (ii) (iii) how the >ournal entries necessary to correct the errors. (narrations not re7uired) $raw up the suspense account after the errors described have been corrected. 2f the net profit had previously been calculated at &A#('' for the year ended ?1 $ecember 2'')# show the calculation of the corrected net profit.

uggested olutions: (i) == 6imited The 8ournal 5articulars 1. uspense 5 H 6 F ales 2. 9. 8ou 9. 8ung ?. 5 H 6 3 @ent uspense A' A' 2<' 2<' $r 89& 1'' 1'' %r 89&

*. uspense 5 H 6 3 $iscount received <. 5 H 6 3 ales ;otor vehicle ). uspense account $iscount received account (ii) uspense Account 89& 1'' ,al bIf ?'' @ent *''

?'' ?'' ?'' ?'' ?)' ?)'

89& ??' A' *''

ales $iscounts received

(iii) Leave for your own practice. ome hints on preparing suspense accounts

$oes a correction involve the suspense accountJ The type of error determines this. 5ractice and study of +!hibit , should ensure that you see immediately which errors affect the balancing of the records and hence the suspense account. "hich side of the suspense account must an entry goJ This is one of the most awkward problems in preparing suspense accounts. The best way of solving it is to ask yourself which side the entry needs to be on in the other account concerned. The suspense account entry is then obviously to the opposite side. 6ook out for errors with two aspects. An entry has been made to the wrong account# but also to the wrong side of the wrong account. ,oth errors must be corrected. 2t is very easy to fall into the trap of correcting only one of the errors# especially when working 7uickly under e!amination conditions.

Durther 5ractice 89%++ Kuestions: 1((A 89%++ 5ast 5aper Kuestion ? 2''' 89%++ 5ast 5aper Kuestion 1' 2''2 89%++ 5ast 5aper Kuestion <