Suspense Accounts and Error Correction

Suspense Accounts and Errors Correction Introduction 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 (See exhibit A). When the trial balance does not agree, the amount of the difference is entered in a suspense account. Exhibit A 　

　

Trial Balance as on 31 December 2005 　 　 　 　

Total after all the accounts have been listed Suspense account

Dr.

　

Cr.

$ 100,000 　

$ 99,960 40

100,000

100,000

Types of Errors There are two types of errors: (i) Errors not affecting Trial Balance Agreement (i.e. total debit = total credit) (ii) Errors affecting Trial Balance Agreement (i.e total debit > total credit or total debit < total credit) Treatment: The difference is temporarily entered into “suspense account” .

Exhibit B: Types of errors

Identify the following errors whether they affect the trial balance agreement or not. Error type Suspense account involved? 1 Error of Omission – a transaction is not recorded at all 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 No

Example: P. Luen paid us by cheque $100, correctly entered in the cash book, but it entered wrongly into the account of P. Lee. 3 Error of principle – an item is posted to the correct side of the wrong type (nature) of account

No

Example: 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) 4 Error of original entry – an incorrect figure is entered in the records and then posted to the correct account

No

Example: Cash HK$1,000 for plant repairs is entered as HK$100; plant repairs account is debited with HK$100 5 Complete 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: We paid cheque of $200 on 20 May 2005 to D.Chan. Debit: Bank Credit: D. Chan

No

6 Compensating errors – two equal and opposite errors leave the trial balance balancing. (this case is rare)

No

Example: Purchases and Sales were overstated by $100. 7 Addition errors – figures are incorrectly added in a ledger account e.g. overcast or undercast 8 Posting error – a) debit but no credit; credit but no debit b) enter a different amount on the debit side from the amount on the credit side.

Yes Yes

Example: cash HK$10,000 entered in the cash book for the purchase of a car is: a) posted to Motor cars account as HK$1,000 only, no posted to cash book 9 Trial balance errors – a balance is omitted, posting an amount incorrectly, or posting a balance to wrong side of the trial balance

Yes

Correcting errors (I) – Suspense account not involved Errors 1 to 6, when discovered, will be corrected by means of a journal entries between the accounts affected. Types of 　 errors 1 Purchases 　 　 　

　

　

　

　

　

　

　

　

　

　

　

T. Hung Purchase of $250 was omitted, now corrected. 2 P. Lee

　 　 　

P. Luen Purchases entered in wrong personal account, now corrected 3 Plant repairs

　 　 　

Plant Repairs of Plant were wrongly entered to Plant account, now corrected.

$

$ 250 　 250 　 　 100 　 100

　 　 5,500 　 5,500 　 　

4 Plant repairs 　 　 　

900 　

Cash Payment of $1,000 incorrectly entered as $100, now corrected.

900 　 　

5 D. Chan 　 　 　 　

400 　

Bank Payment of $200 to D. Chan incorrectly credited to his account, and debited to bank. Error now corrected

400 　 　 　 100 　

6 Sales 　 　 　

Purchases Sales and purchases accounts were overcast by $100, now corrected. 　 　 　

100 　　

　 　

* For public examinations, narrations are usually not required for this topic.

Classwork 1. Show the journal entries necessary to correct the following errors: (Narrations are not required) (i) A sale of goods $678 to H. Luen had been entered in H. Lui’s account. (ii) The purchase of a machine on credit from L. Po for $4,390 had been completely omitted from our books. (iii) The purchase of a motor van $3,800 had been entered in error in the motor expenses account. (iv) A sale of $221 to C. Fat had been entered in the books, both debit and credit as $212. (v) Commission received $257 had been entered in error in the sales account.

Correcting Errors (II) – Suspense account involved Errors 7 to 8 also require journal entries to correct them. One side of the journal entry will be entered to the suspense account opened for the difference in the records. Error 9, 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. Only single entry is needed.

Types of errors

Examples

Correcting journal entries $

8

A credit sale of $150 to Mr. Chan has been omitted from his account.

Dr. Mr. Chan Cr. Suspense

150 150

8

A sale to C. Lee for $250 was correctly entered in the sales book but entered in C. Lee’s account as $520.

Dr. Suspense Cr. C. Lee

270 270

8

A credit sale of $100 has been credited to H. Cheung’s account

Dr. H. Cheung Cr. Suspense

7

Sales day book was overcast by $200

Dr Sales Cr Suspense

200 200

7

Sales account was undercast by $40

Dr Suspense Cr Sales

40 40

9

The total of the sales account of $1,500 has been omitted from the trial balance

Dr Suspense

1,500

9

The total of the sales account of $1,500 has been extracted as $1,200 in the trial balance.

Dr. Suspense

300

9

The total of the sales account of $1,500 has been extracted to the debit column of the trial balance

Dr Suspense ($1,500 x 2)

3,000

200 200

 For HKCEE examinations, it often requires you to do the following 3 things:  Show the journal entries to correct the errors  Draw up the suspense account  Show the calculation of the of the corrected net profit

An illustrative example (involving errors 1 -9) The book-keeper of YY Limited extracted a trial balance on 31 December 2006 which failed to agree by $330, a shortage on the credit side of the trial balance. A suspense account was opened for the difference. In January 2007 the following errors made in 2006 were found: (a) Sales day book had been undercast by $100. (b) Sales of $250 to K. Hou had been debited in error to K. Hung’s account. (c) Rent account had been undercast by $70. (d) Discounts received account had been undercast $300. (e) The sale of motor vehicle at book value had been credited in error to sales account $360. (i) (ii) (iii)

Show the journal entries necessary to correct the errors. (narrations not required) Draw up the suspense account after the errors described have been corrected. If the net profit had previously been calculated at $7,900 for the year ended 31 December 2006, show the calculation of the corrected net profit.

Suggested Solutions: (i)

YY Limited The Journal Particulars

1. Suspense

Dr HK$ 100

P & L - Sales 2. K. Hou

100 250

K. Hung 3. P & L – Rent Suspense

Cr HK$

250 70 70

4. Suspense

300

P & L – Discount received

300

5. P & L – Sales

300

Motor vehicle

300

6. Suspense account

360

Discount received account

360

(ii) 　

　

Sales Discounts received

Suspense Account HK$ 100 Bal b/f 300 Rent 400

　

　 HK$ 330 70 400

(iii) Leave for your own practice. Some hints on preparing suspense accounts •

•

•

Does a correction involve the suspense account? The type of error determines this. Practice and study of Exhibit B 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. 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.

Further Practice HKCEE Questions: 1997 HKCEE Past Paper Question 3 2000 HKCEE Past Paper Question 10 2002 HKCEE Past Paper Question 5