Correction of errors

Suspense account as a temporary measure to

balance the trial balance
 Lesson objectives

• By the end of the lesson the learner should be able

to:
• Explain the use of a suspense account as a
temporary measure to balance the trial balance.
• Correct errors by means of suspense accounts.
 Errors affecting trial balance
• Errors that affect the trial balance will cause the
trial balance totals to be unequal.
• The errors are:
• Incorrect totalling in any account
• Recording only one aspect of a transaction, for
example,
• Recording a debit but omitting the credit
• using different figures for debit and credit entries.
 suspense account
• It is important to make the trial balance totals agree so that
draft financial statements can be prepared.
• A suspense account is opened with the difference in the trial
balance totals.
• If the total debits are more than the total credits in the trial
balance, then the difference is recorded in the suspense account
as a credit.
• If the credits exceed the debits, the difference is recorded as a
debit.
• With the suspense account, the trial balance will balance.
 Suspense account and correction of
errors
• One suspense account is opened to accommodate
all the errors until they are found.
• These errors are then corrected by means of
journal entries and the suspense account closes
automatically.
 Worked example 2
• The bookkeeper extracted a trial balance on 30 June 2019 which failed to agree by $500, a
shortage on the credit side of the trial balance.
• A suspense account was opened for the difference.
• In the first week of July 2019, the following errors, made in the previous financial year, were
found:
• a Purchases journal had been undercast by $70.
• b Sales of $350 to Manny had been debited in error to Danny’s account.
• c Sales journal had been undercast by $670.
• d Rent account had been undercast by $100.
To correct error ‘c’ which affects the trial
balance, an entry will be made in the
suspense account:
 To correct error ‘d’ which affects the trial
balance, an entry will be made in the suspense
account:
 Adjusting profit or loss after a
correction of errors
• It will be necessary to adjust profit or loss after correcting errors.
• The following rules apply:
• If errors are discovered after the preparation of the income
statement, profit from that income statement will need adjustments.
• Errors that affect items in the trading account section of the income
statement, such as sales or purchases, will affect the gross profit as
well as the profit for the year.
• Errors that affect items in the profit and loss section of
the income statement, such as expenses or income, will
affect only profit for the year.
• Errors which only affect statement of financial position
items, such as assets and liabilities, will not affect profit.
 Worked example 3
• Effect of correcting errors on profits
• The trial balance of Hakim as at 31 July 2018 showed a difference
that was posted to a suspense account.
• Draft financial statements for the year ended 31 July 2018 were
prepared
showing a profit for the year of $3 500.
 The following errors were subsequently
discovered:
1. Sales of $560 to Malli had been debited to Ralli’s account.
2. A payment of $350 for rent had been entered on the debit side
of the rent account as $340.
3. The sales journal had been undercast by $450.
4. Repairs to motor vehicle worth $45 had been charged to motor
vehicle account.
5 A cheque for $445, being rent received from Bala, had only been
entered in the cash book.
6 A purchase of fittings $350 had been entered in the purchases
account.
7 A cheque for $56 received from a debtor had been correctly
entered in the cash book but posted to the customer’s account as
$50.
 Effect of correcting errors on
statement of financial position
• A large quantity of data is usually involved in preparing a statement
of financial position and this means that accounting errors may occur.
• Such errors could be genuine or attempts to conceal fraud.
• If errors are discovered after the preparation of draft financial
statements, the statement of financial position must be amended.
• a correction of profit for the year in the income statement will affect
the equity section of the statement of financial position.
 Worked example 4
• Correction of errors and the statement of financial position.
• Meher’s financial year ends on 31 July. As her trial balance
totals did not agree, a suspense account was opened and
draft financial statements prepared. After the errors
shown below were discovered and corrected in the
income statement, the adjusted profit for the year was
calculated as $23 000 for the year.
• However, no adjustments were made to the statement of financial position
after the correction of the errors below.
• 1 The sales account was undercast by $300.
• 2 Purchases returns worth $570 were correctly entered in the supplier’s
account but debited to the sales returns account in error.
• 3 No entry was made for motor expenses of $25 paid by cheque.
4 $450 in cash was paid to a credit supplier and was entered correctly in the cash book,
but no other entry was made.
5 Credit purchases of $670 from Mosaic Ltd were correctly entered in the purchases
account, but credited in Mosaic Ltd’s account as $760.
6 Meher deposited $4 500 cash into the business bank account. The bank account was
credited and capital account debited, in error.
• The statement of financial position will be affected in the
following way after the correction of the errors:
• • $23 000 is added to capital as profit for the year after correction
of errors in the income statement.
• • Errors 1 and 2 – these have been corrected and the corrected
profit for the year of $23 000 reflects these corrections.
• • Error 3 – motor expenses have been considered to arrive at the
corrected profit for the year.
• However, since the payment was made by cheque and the entry
was completely omitted, the bank account should be decreased by
$25.
• • Error 4 – the supplier received cash and therefore trade payables
should be decreased by $450. The cash book is correct.
• Error 5 – Mosaic is a supplier whose account was wrongly
credited with $760 instead of $670, a difference of $90; therefore,
trade payables should be reduced by $90.
• Error 6 – this is an error of complete reversal and both accounts
involved – the bank account and the capital account – are in the
statement of financial position. Both these accounts will be
increased by $9 000 ($4 500 x 2).