Interactive work - Sheet on Suspense Accounts
by Ken Delaney-Moore
Aims:
This worksheet deals with:
- Errors not revealed by the trial balance
- Errors which are revealed by the trial balance
- The principle of suspense accounts
- Correction of errors using the journal
- Calculating the corrected net profit
After having completed the work - sheet you should have a greater understanding of these issues.
Having finished this work - sheet you should also be prepared for the objective assessment on suspense accounts.
Errors not revealed by the trial balance
Certain types of book-keeping errors are not revealed by the trial balance. In other words, the trial balance totals will still agree. You may have come across these in your previous studies. There are six types of error 'not revealed by the trial balance'.
Imagine the following transaction:
"Bought goods for cash, £200".
The correct double-entry for this is: "debit purchases a/c £200, credit cash a/c £200".
Errors that are revealed by the trial balance
Certain book - keeping errors will throw the trial balance total 'out' (i.e. the debit and credit totals will not agree). These errors include:
- making a debit without a corresponding credit (or vice-versa); or
- making a debit and a credit for differing amounts.
The principle of suspense accounts
'Suspense' is a state of being uncertain.
Errors concerning relatively large ('material') amounts should be found before the T & P & L a/c and B.S. are drawn up.
If we cannot explain a discrepancy for a smaller amount then we do not allow this to delay the preparation of the final accounts. Instead, we draw up a suspense account.
Example
We have balanced off the accounts and drawn up a trial balance (as at 31st March) the totals of which are as follows:
| £ dr | £ cr |
|---|---|
| 12,140 | 12,240 |
We therefore know that at least one mistake has been made which has thrown the totals 'out' by £100. We must make the trial balance totals agree, We do this by opening up an account and (in this case) debiting it with £100. We could even call this a 'mistakes account', but we prefer to call it a suspense account because we are only uncertain at the time of the drawing up of the final accounts. Hopefully, we will find out in due course the reason for the imbalance.
Suspense account
| Date | Debits | £ | Date | Credits | £ | |
|---|---|---|---|---|---|---|
| 31 3 | Difference per trial balance | 100 |
Notice that there is no corresponding credit for this debit. The trial balance totals should now agree at £12,240.
A suspense account is therefore a temporary 'holding' account onto which we place amounts in order to make the trial balance. totals agree.
A little while later.........
Suppose on 17th May we found the error (say that an invoice of £100 had been credited to the suppliers' a/c but we had forgotten to debit the purchases a/c). We therefore correct the error as follows:
Suspense account
| Date | Debits | £ | Date | Credits | £ | |
|---|---|---|---|---|---|---|
| 31 3 | Difference per trial balance | 100 | 17 5 | Purchases | 100 |
Purchases account
| Date | Debits | £ | Date | Credits | £ | |
|---|---|---|---|---|---|---|
| 17 5 | Suspense | 100 |
Notice that the correction of the error involves a double-entry; notice also that one half of the double-entry is in the suspense account. The balance on the suspense account is zero and the correct amount is on the purchases account.
Correction of errors using the journal
The above double-entry will need to go through a 'book of original entry' - in the case of the correction of errors this will be the journal. Journal entries should follow the protocol:
Account(s) to be debited
Account(s) to be credited
Narrative (optional)
| Date | Account name | F | Debits | Credits |
|---|---|---|---|---|
| 17 5 | Purchases | 100 | ||
| Suspense | 100 | |||
| Being correction of under-casting of purchases account. | ||||
Calculating the corrected net profit
Suppose the reported profit for the period up to 31.3 had been £2,120. The 'purchases' figure was included in the calculation of the profit. If the 'purchases' figure was wrong, it follows that the profit figure was also wrong.
Your turn
In the following example we will look at a combination of errors. On 31st March the trial balance totals were £50 overcast on the debit side. A suspense a/c was opened.
On 8th June the following errors were found:
- A credit purchase of £120 had been debited to purchases but the suppliers account (S.Nawaz) had not been credited.
- A cheque received for £60 from a debtor had not been entered in the cash book. The other half of the double entry had been completed correctly.
On 10th June it was also discovered that cash paid for fixtures had been entered in the fixtures account as £100 - it should have been £110. The other half of the double entry had been completed correctly.
Complete the following multiple - choice question with regard to the correction of this error:
After you have attempted the above question look at the completed suspense account
You should now be able to attempt the: Objective test on suspense accounts