SUSPENSE ACCOUNTS AND ERROR

CORRECTION
AddThis Sharing Buttons
Share to EmailShare to PrintShare to FacebookShare to TwitterShare to LinkedInShare to More

RELATED LINKS

 Student Accountant hub

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:

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 (apart from the correction of a trial balance error – see error type 8 in
Table 1).

Types of error
Before we look at the operation of suspense accounts in error correction, we need to think
about types of error – not all types affect the balancing of the records and hence the
suspense account. Refer to Table 1.

Table 1: Types of error

Suspense
Error type   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
  No
account (there is a debit and a credit here, so the records balance)
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)   No
(errors of principle are really a special case of errors of commission, and once
again there is a debit and a credit)
4 Error of original entry – an incorrect figure is entered in the records and then
posted to the correct account
  No
Example: Cash $1,000 for plant repairs is entered as $100; plant repairs
account is debited with $100
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:   No
Debit: Plant maintenance
Credit: Factory wages
Easily done the wrong way round
6 Addition errors – figures are incorrectly added in a ledger account   Yes
7 Posting error   Yes
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:
 Suspense
Error type   account
involved?

a. not posted at all

b. posted to Motor cars account as $1,000
8 Trial balance errors – a balance is omitted, or incorrectly extracted, in
  Yes
preparing the trial balance
9 Compensating errors – two equal and opposite errors leave the trial balance Yes, to correct
balancing (this type of error is rare, and can be because a deliberate second each of the errors
 
error has been made to force the balancing of the records or to conceal a as discovered
fraud). Yes, to correct each of the errors as discovered

For examination purposes we are more often concerned with the second of these –
differences and error correction.

Correcting errors
Errors 1 to 5, when discovered, will be corrected by means of a journal entry between the
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 accounts. 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:

1. $8,980 – the total of the sales returns book for September 20X8, had been credited to the purchases
returns account.
2. $9,600 paid for an item of plant purchased on 1 April 20X8 had been debited to plant repairs
account. The company depreciates its plant at 20% per annum on a straight line basis, with
proportional depreciation in the year of purchase.
3. The cash discount totals for the month of September 20X8 had not been posted to the general ledger
accounts. The figures were:
Discount allowed $836
Discount received $919
4. $580 insurance prepaid at 30 September 20X7 had not been brought down as an opening balance
5. The balance of $38,260 on the telephone expense account had been omitted from the trial balance
6. A car held as a non-current asset had been sold during the year for $4,800. The proceeds of sale
were entered in the cash book but had been credited to the sales account in the general ledger. The
original cost of the car $12,000, and the accumulated depreciation to date $8,000, were included in
the motor vehicles account and the accumulated depreciation account. The company depreciates
motor vehicles at 25% per annum on a straight line basis with proportionate depreciation in the year
of purchase but none in the year of sale.

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)

Discussion
The approach to the question should be:

1. Read the requirement paragraph at the end of the question.

2. Attack the question – note that narratives are not required. Begin by opening the suspense account.
Which side? More debit is needed to balance the trial balance, so debit the suspense account with
$56,717.

Then deal with the errors in order:

1. Sales returns should have been debited to the sales returns account and they have been credited to
the purchases returns account. There are two errors here – the wrong account has been used and
an entry which should have been a debit has been entered as a credit. The suspense account entry
must therefore be for 2 x $8,980 or $17,960.
2. An error of principle – no suspense account entry. Depreciation must be adjusted.
3. Items have not been posted, therefore the suspense account is involved.
4. Effectively a posting error – the suspense account is again involved.
5. A trial balance error must affect the suspense account – but no ledger entry.
6. This one needs thought. Take it one sentence at a time. Is the suspense account involved? No,
because we have an error of commission followed by some unrecorded transactions.

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  
    Discount allowed 836  
        --- Insurance  580  
Telephone (trial
    38,260  
balance)
  57,636   57,636  
Journal Entries       
    $ $ 
1 Sales returns
  8,980    
account
   Suspense account     8,980  
   Purchases
  8,980   
   returns account
   Suspense account     8,980  
2 Plant account   9,600    
   Plant repairs
    9,600   
   account
   Depreciation
   (income   960    
statement)
   Plant depreciation     960  
 Suspense
       
Account

   account
3 Discount allowed
  836    
account
   Suspense account     836  
   Suspense account   919    
   Discount received
    919  
   account
4 Insurance account   580    
   Suspense account     580  
5 Trial balance
  38,260    
   (no ledger entry)
   Suspense account     38,260  
6 Sales account   4,800    
   Motor vehicles
    4,800  
   disposal account
   Motor vehicles
  12,000    
   disposal account
   Motor vehicles
    12,000  
   asset account
   Motor vehicles
   depreciation   8,000    
account
   Motor vehicles
    8,000  
   disposal account
   Motor vehicles
  800    
   disposal account
   Income statement     800   

Table 3: Answer – Part (b)

Adjustment to profit - +

  $ $
Profit as in draft income
  141,280
statement
1 Sales returns adjustment
17,960  
   (2 x $8,980)
2 Plant: reduction in repairs   9,600
   depreciation – 6/12 x 20% x
960  
   $9,600 960 
3 Discount allowed 836  
   Discount received   919
4 Insurance – opening balance
580  
   omitted
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

  Does a correction involve the suspense account? The type of error determines this. Practice, and
study of Table 1 should ensure that you see immediately which errors affect the balancing of the
records and hence the suspense account.
 Which side of the suspense account must an entry go? 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.
 Look out for errors with two aspects. In the illustrative question earlier, error 1 is a case in point. An
entry has been made to the wrong account, but also to the wrong side of the wrong account. Both
errors must be corrected. It is very easy to fall into the trap of correcting only one of the errors,
especially when working quickly under examination conditions.

Last updated: 17 Mar 2017