Chapter 13: Correction of errors and suspense accounts

Chapter learning objectives

Upon completion of this chapter you will be able to:

• identify the types of error which may occur in bookkeeping systems
• identify errors which would not be highlighted by the extraction of a trial balance
• identify errors leading to the creation of a suspense account.
• describe the purpose of a suspense account
• prepare journal entries to correct errors and clear out a suspense account
• prepare statements correcting profit for errors discovered.

1 Type of error

 Errors where the trial balance still balances

• Error of omission: A transaction has been completely omitted from the accounting records, e.g. a cash sale of $100 was not recorded.
• Error of commission: A transaction has been recorded in the wrong account, e.g. rates expense of $500 has been debited to the rent account in error.
• Error of principle: A transaction has conceptually been recorded incorrectly, e.g. a non-current asset purchase of $1,000 has been debited to the repair expense account rather than an asset account.
• Compensating error: Two different errors have been made which cancel each other out, e.g. a rent bill of $1,200 has been debited to the rent account as $1,400 and a casting error on the sales account has resulted in sales being overstated by $200.
• Error of original entry: The correct double entry has been made but with the wrong amount, e.g. a cash sale of $76 has been recorded as $67.
• Reversal of entries: The correct amount has been posted to the correct accounts but on the wrong side, e.g. a cash sale of $200 has been debited to sales and credited to bank.

When correcting these errors, a good approach is to consider:

(1)What was the double entry? (‘did do’).

(2)What should the double entry have been? (‘should do’).

(3)Therefore what correction is required? (‘to correct’).

Always assume that if one side of the double entry is not mentioned, it has been recorded correctly.

Test your understanding 1

Provide the journal to correct each of the following errors:

(1)A cash sale of $100 was not recorded.

(2)Rates expense of $500, paid in cash has been debited to the rent account in error.

(3)A non-current asset purchase of $1,000 on credit has been debited to the repairs expense account rather than an asset account.

(4)A rent bill of $1,200 paid in cashhas been debited to the rent account as $1,400 and a casting error onthe sales account has resulted in sales being overstated by $200.

(5)A cash sale of $76 has been recorded as $67.

(6)A cash sale of $200 has been debited to sales and credited to cash.

Errors where the trial balance does not balance

• Single sided entry – a debit entry has been made but no corresponding credit entry or vice versa.
• Debit and credit entries have been made but at different values.
• Two entries have been made on the same side.
• An incorrect addition in any individual account, i.e. miscasting.
• Opening balance has not been brought down.
• Extraction error – the balance in the trial balance is different from the balance in the relevant account.

If there is a difference on the trial balance, then a suspense account is used to make the total debits equal the total credits:

The balance on the suspense account must be cleared before final accounts can be prepared.

Corrections to any of the six errors mentioned above will affect the suspense account.

2 Suspense accounts

A suspense account is an account in which debits or credits areheld temporarily until sufficient information is available for them tobe posted to the correct accounts.

Suspense accounts are often encountered and must be dealt with according to the usual rules of double entry bookkeeping.

There are two main reasons why suspense accounts may be created:

• On the extraction of a trial balance the debits are not equal to the credits and the difference is put to a suspense account.
• When a bookkeeper performing double entry is not sure where to post one side of an entry he may debit or credit a suspense account and leave the entry there until its ultimate destination is clarified.

Approach to questions:

• Take the approach as before.
• Use the suspense account to make the ‘did do’ Dr = the ‘did do’ Cr and then part of the correction journal will be to reverse this suspense account entry.

E.g. The purchase of a non-current asset costing $100 has beenrecorded by debiting $10 to the non-current assets account and crediting$100 to cash. 

• Where an opening balance has not been brought down, journal it in and send the opposite entry to suspense.
• The correction journal must always include an equal debit and credit.

Test your understanding 2

The debit side of a company’s TB totals $1,200 more than thecredit side. Which of the following errors would fully account for thedifference?

AThe petty cash balance of $1,200 has been omitted from the TB

BA receipt of $1,200 for commission receivable has been omitted from the records

C$600 paid for plant maintenance has been correctly entered into the cash book and credited to the plant cost account

DDiscount received of $600 has been debited to the discount allowed account

Test your understanding 3

Bond’s TB failed to agree and a suspense account was opened forthe difference. Bond does not maintain control accounts for sales andpurchases. The following errors were found in Bond’s accountingrecords:

(1) In recording the sale of a non-current asset, cash received of $33,000 was credited to the disposals account as $30,000.

(2) An opening accrual of $340 had been omitted.

(3) Cash of $8,900 paid for plant repairs was correctly accounted for in the cash book but was credited to the plant cost account.

(4) A cheque for $12,000 paid for the purchase of a machine was debited to the machinery account as $21,000.

Which of the errors will require an entry to the suspense account to correct them?

A 1, 3 and 4 only

B All

C 1 and 4 only

D 2 and 3 only

Suspense accounts

On extracting a trial balance, the accountant of ETT discovered asuspense account with a debit balance of $1,075 included therein; shealso found that the debits exceeded the credits by $957. She posted thisdifference to the suspense account and then investigated the situation.She discovered:

(1) A debit balance of $75 on the postage account had been incorrectly extracted on the list of balances as $750 debit.

(2) A payment of $500 to a creditsupplier, X, had been correctly entered in the cash book, but no entryhad been made in the supplier’s account.

(3) When a motor vehicle had beenpurchased during the year the bookkeeper did not know what to do withthe debit entry so he made the entry Dr Suspense, Cr Bank $1,575.

(4) A credit balance of $81 in the sundry income account had been incorrectly extracted on the list of balances as a debit balance.

(5) A receipt of $5 from a creditcustomer, Y, had been correctly posted to his account but had beenentered in the cash book as $625.

(6) The bookkeeper was not able todeal with the receipt of $500 from the owner’s own bank account, andhe made the entry Dr Bank and Cr Suspense.

(7) No entry has been made for a cheque of $120 received from a credit customer M.

(8) A receipt of $50 from a credit customer, N, had been entered into his account as $5 and into the cash book as $5.

What journals are required to correct the errors and eliminate the suspense account?

Solution

Solution

Process of clearing a suspense account

The starting position we have is as follows (once we have posted our$957):

We now need to work our way through the information given in numbered points 1 to 8 to try and clear this suspense account.

You need to ask yourself the following questions for each point:

(a) what was the double entry that has been made?

(b) what should the double entry have been?

(c) what is the journal we need to correct this?

Now you can post all of the journals that you have listed under the (c) corrections which affect the suspense a/c.

Then you can balance off your suspense a/c and it shouldbalance on both the debit and credit sides. Hence, this will clear yoursuspense a/c and leave it with a nil balance.

Once you have done so, you should get the following result:

3 Adjustments to profit

The correction journal may result in a change in profit,depending on whether the journal debits or credits the income statement:

For this purpose the suspense account is defined as a statement of financial position account.

Test your understanding 4

The following correction journals have been posted by Boris Brokovitch, a self-employed plumber:

(1) Dr Suspense $4,000

(2) Dr Payables $2,500

(3) Dr Loan interest $1,000

(4) Dr Suspense $650

(5) Dr Suspense $6,000

Boris’ draft profit figure prior to the posting of these journals is $355,000.

What is the revised profit figure?

A $354,000

B $358,650

C $356,150

D $358,000

What affect will these correction journals have on the Statement of financial position?

4 Statement of comprehensive income

Your correction journals may also affect the Statement ofcomprehensive income. The only correction journals which would affectthis would be revaluation journals.

Chapter summary

Test your understanding answers

Test your understanding 1

Test your understanding 2

The correct answer is D

A and C would result in the credit side of the TB being $1,200 higher than the debit side.

B would have no effect on the TB since neither the debit nor the credit side of the transaction has been accounted for.

Test your understanding 3

The correct answer is B

An entry to the suspense account is required wherever anaccount is missing from the trial balance or the initial incorrect entrydid not include an equal debit and credit.

Test your understanding 4

Income statement profits

The correct answer is B

Statement of financial position

Journal 1
The Dr entry would go towards clearing any suspense a/c balance.

Journal 2
The Dr payables would decrease the current liabilities. The Crsuspense a/c would go towards clearing the account balance.

Journal 3
The Cr loan would increase the loan liability balance. It does not state whether it is current or non-current.

Journal 4
The Dr suspense a/c would work towards clearing any balance left.

Journal 5
Dr suspense a/c would completely clear the balance in thisaccount. The Cr cash would decrease the cash balance held, which is acurrent asset.

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