You are on page 1of 10

Content Introduction A) What is suspense account B) Types of errors that will lead to the creation of suspense accounts C) Types

of errors that will NOT lead to the creation of suspense accounts Conclusion References

Page 2 3, 4 5, 6 7, 8 9 10

Introduction Accounting Errors are those mistakes which are done by accountant due to ignorance or any other reason. These errors may be principle mistakes, clerical errors, errors or commission, errors of omission and errors of compensating. Some of errors effect on side which can be easily revealed by making trial balance but some errors cannot be disclosed by making trial balance. Accounting errors affect company's profit and loss account and balance sheet. After accounting errors in books of company, company cannot show correct and true net profit or net loss and financial position in his financial statements. So, it is very necessary to correct these accounting errors by adopting the procedure of rectification of errors. Rectification of errors is simple technique to correct all types of accounting errors for showing correct profit and financial position in financial statements.

A. Explain what suspense account is. A suspense account serves as a holding account for temporarily unallocated funds. In double-entry accounting, every credit must be offset by a debit. Sometimes, funds do not fit cleanly into a specific bucket. The bookkeeper must do something with the money, but he can't arbitrarily choose a location. He places the funds in a suspense account to give him extra time. After he completes the other entries, he can go back and properly allocate the funds from suspense. For example, if a bank processes all payments at its headquarters in Malaysia, but a customer makes his payment at a branch in Hong Kong, the teller utilizes a suspense account. He debits the customer's account and credits the payment suspense account. The processor at headquarters debits the suspense account and credits the loan. An accountant finds a receipt without an immediately apparent purpose. Rather than waste time, he debits the bank account and credits the suspense account. When he finds the purpose, he debits the suspense account and credits the appropriate general ledger account. While funds are held in suspense, the bookkeeper ensures it stays in balance. The account balance should remain the same until money is moved to or from the account. The bookkeeper reviews a trial balance each day. The trial balance details all account balances at the prior day's close of business. If funds go into or out of the account, the bookkeeper must know why the balance has changed. If the activity is not properly documented, it will be difficult to pinpoint the reason. A suspense account is a temporary receptacle. The accountant needs to clear the funds as soon as possible. Occasionally, funds will remain for an extended period. An example is

a partial commitment fee. The fee is held in suspense until the loan closes. After settlement, the fee is deferred against the loan balance on the system. The idea behind a suspense account is that the accountant only needs it until he knows what to do with the money. If the account carries significant balances for lengthy time frames, the accountant's competence can be called into question.

B. State the types of errors that will lead to the creation of suspense accounts and explain with simple illustrations. i. Addition Error: Figures are incorrectly added in a ledger account. For example, sales account was overcast by RM100.

Sales Suspense account

RM 100

RM 100


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. For example, cash RM20000 entered in the cash book for the purchase of motor vehicles. A) No posted in to motor vehicles account.
RM 20000 RM 20000

Motor vehicles Suspense account

B) Posted to motor vehicles account as RM5000.

RM 15000 RM 15000

Motor vehicles Suspense account


Trial Balance Error: A balance is omitted, posting an amount incorrectly, or posting a balance to wrong side of trial balance. For example, the total of the sales account of RM2500 has been extracted to the debit column of the trial balance.
RM 5000 RM 5000

Suspense account Trial balance (no ledger entry)

C. State the types of errors that will NOT lead to the creation of suspense accounts and explain with simple illustrations. i. Error of Omission: The transaction is not recorded at all. For example, Purchase of RM2000 was omitted.
RM 2000 RM 2000

Purchase Albert Lai


Error of Commission: An item is entered to the correct side of the wrong account. There is a debit and credit here, so the records balance. For example, Ms. Lee paid us by cash RM2500 correctly entered in the cash book, but it entered wrongly into the account of Ms. Chan.
RM 2500 RM 2500

Ms. Lee Ms. Chan


Error of Principle: An item is posted to the correct side of the wrong type of account. It is really a special case of error of commission, and once again there is a debit and a credit. For example, cash RM5000 paid for motor vehicle repairs is debited to motor vehicles account.
RM 5000 RM 5000

Motor vehicle repairs Motor vehicles


Error of Original Entry: An incorrect figure is entered in the records and then posted to the correct account. For example, cash RM650 for rent, but rent account is debited with RM500.
RM 150 RM 150

Rent Cash


Compensating Errors: The amount is correct, entered in the correct account but entered in the wrong side of account. For example, Bob paid cheque of RM500 on 19 Feb 2013. Debit: Bank Credit: Bob
RM 500 Bank RM 500



Compensating Errors: Two equal and opposite errors leave the trial balance balancing and this case happen rarely. For example, sales and purchases were overstated by RM800.
RM 800 RM 800

Sales Purchases

Conclusion Accounts give us basic information upon which we make decision, such as What are my sales?, How much money is in the bank?, How much money am I owed in the bank?, How much money am I owed? or Am I making a profit? If our accounts are not giving us the right answers to these questions, it will lead us to make a wrong decision and simply not earn the return from the business that we should have.

References 1. 2. 3. 4. 5. 6. Lecturers note