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Suspense accounts and error correction
by Neil Stein 16 May 2007
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:
- a bookkeeper is unsure where to post an item and enters it to a suspense account pending instructions
- 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
Error type Suspense 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 account (there is a debit and a credit here, so the records balance)
No
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) (errors of principle are really a special case of errors of commission, and once again there is a debit and a credit)
No
4 Error of original entry - an incorrect figure is entered in the records and then posted to the correct account Example: Cash $1,000 for plant repairs is entered as $100; plant No
repairs account is debited with $ 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: Debit: Plant maintenance Credit: Factory wages Easily done the wrong way round
No
6 Addition errors - figures are incorrectly added in a ledger account Yes
7 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 Examples: cash $10,000 entered in the cash book for the purchase of a car is: a not posted at all b posted to Motor cars account as $1,
Yes
8 Trial balance errors - a balance is omitted, or incorrectly extracted, in preparing the trial balance Yes
9 Compensating errors - two equal and opposite errors leave the trial balance balancing (this type of error is rare, and can be because a deliberate second error has been made to force the balancing of the records or to conceal a 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 20X the bookkeeper was unable to balance the accounts. The trial balance totals were: Debit $1,796, Credit $1,852,
Then deal with the errors in order:
- 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.
- An error of principle - no suspense account entry. Depreciation must be adjusted.
- Items have not been posted, therefore the suspense account is involved.
- Effectively a posting error - the suspense account is again involved.
- A trial balance error must affect the suspense account - but no ledger entry.
- 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, Discount received 919 Purchases returns 8, Discount allowed 836 Insurance 580 Telephone (trial balance) 38, 57,636 57,
Journal entries
- 1 Sales returns account 8, $ $ - Suspense account 8,
- Purchases returns account 8,
- Suspense account 8,
- 2 Plant account 9,
- Plant repairs account 9,
- Depreciation (income statement)
- Plant depreciation account
- 3 Discount allowed account
- Suspense account
- Discount received account
- 4 Insurance account
- Suspense account
- 5 Trial balance (no ledger entry) 38,
- Suspense account 38,
- 6 Sales account 4,
- Motor vehicles disposal account 4,
- Motor vehicles disposal account 12,
- Motor vehicles asset account 12, - Motor vehicles depreciation account 8,
- Motor vehicles disposal account 8, - Motor vehicles disposal account
- Income statement
