Lecture 2: Errors and Suspense Account

Financial Accounting 2 Ms Subashini BSc Accounting (Hons)

Errors
Errors

not affecting trial balance agreem

ent Errors affecting trial balance agreement

Errors not affecting trial balance agreement

E.g. Errors of commission Errors of principle Errors of original entry Errors of omission Compensating errors Complete reversal of entries

Errors affecting trial balance agre ement

Suspense

account

Examples of account
1. 2. 3. 4. 5.

Correcting entry

Asset Purchases Expenses Returns Inwards Drawings

Increase Debit Decrease - Credit

Examples of account 1. Liabilities/Capital 2. Sales 3. Income 4. Returns Outwards

Correcting entry Increase Credit Decrease Debit

Errors Not Affecting Trial Bal ance Agreement

Errors of Commission
The

correct amount is entered but in a wrong personal account

Example
A purchase

of goods from C.Lee has be en posted to the credit side of C.Lai s a ccount in error, amounting to $500. The correcting entries should be:

Original entry: Dr Purchase $500 Cr C Lee $500 Wrong entry: Dr Purchase $500 Cr C Lai $500

The journal
$ C.Lai C.Lee Purchases entered in wrong personal account, now corrected. 500 500 $

C. Lai C.Lee $ 500 Purchases $ 500

C. Lee C.Lai $ 500

Errors of Principle
An

item is entered in the wrong type of account due to misunderstanding of the nature of the item.

Example
Office

equipment purchased for $1,000 i n cash has been debited to an office ex penses account. The correcting entries should be:
Original entry: Dr Office Equipment $1000 Cr Cash $1000 Wrong entry: Dr Office Expenses $1000 Cr Cash $1000

The journal
$ Office Equipment Office Expenses 1,000 1,000 $

Purchase of office equipment wrongly entered in the office expenses account, now corrected.

Office Expenses $ 1,000 Office Equipment $ 1,000

Cash

Office Equipment $ Office Expenses 1,000

Errors of Original Entry

Wrong

original figure is entered in the jo urnals, and hence posted incorrectly to t he accounts.

Example
A payment

of $1,200 to a creditor, M.W ong, has been entered as both a debit a nd credit as $1,000. The correcting entr ies should be:
$1200 $1200

Original entry: Dr Mr. Wong Cr Bank

Wrong entry: Dr Mr. Wong $1000 Cr Bank $1000

The journal
$ M Wong(1200-1000) Bank 200 200 $

Payment of $1,200 incorrectly entered as $1,000, now corrected.

M. Wong $ Bank Bank 1,000 200

Bank $ M. Wong M. Wong 1,000 200

Errors of Omission
A transaction

has been completely omitt ed from the accounts.

Example
A sale

of $400 to John Leung has been completely omitted from the accounts. The correcting entries should be:

Original entry: Dr John Leung $400 Cr Sales $400 Wrong entry: No entry

The journal
$ John Leung Sales A sale of $400 was omitted, now corrected. 400 400 $

Sales $ John Leung 400

John Leung $ Sales 400

Compensating Errors
Debit

side errors are equal to credit side errors.

Example
The

purchases account was undercast by $2,200, and the sales account was a lso undercast by $2,200. The correctin g entries should be:

The journal
$ Purchases Sales Purchases and sales accounts were undercast by $2,200, now corrected. 2,200 2,200 $

Purchases $ Sales 2,200

Sales Purchases $ 2200

Complete Reversal of Entries

The

correct amounts are entered in the wrong sides of the two appropriate acco unts.

Example
The

purchase of goods on credit from M. Lok for $60 was entered on the debit side of M. Loks account and the credit side of the purchases account. The cor recting entries should be:
Original entry: Dr Purchase $60 Cr M Lok $60 Wrong entry: Dr M Lok $60 Cr Purchase $60

The journal
$ Purchases ($60 x 2) M. Lok ($60 x 2) Purchases from M. Lok incorrectly debited to his account and credited to the purchases account, now corrected. 120 120 $

Purchases $ 120 M. Lok $ 60

M. Lok

M. Lok $ 60 Purchases $ 120

Purchases

Errors Affecting Trial Balance Agreement

Errors affecting trial balance agre ement may occur when

(i)

recording transactions in the account

s:
(1) omitting a debit or credit entry (2) posting a wrong amount to one of the a ccounts (3) recording an entry on the wrong side
E.g. a debit entry entered as a credit or a credit en try as a debit

 (ii)

Balancing of accounts:

Incorrect calculation of a balance E.g. overcast or undercast

(iii)

Drawing up a trial balance:

(1) omitting a balance from the trial balance (2) incorrectly posting an amount to the trial balance (3) incorrectly posting a balance to the wrong side of the trial balance

Suspense Account
When

the trial balance does not agree, t he amount of the difference is entered i n a suspense account.

Trial Balance as at 31 December 1996

$ Total balances extracted Suspense account 100 10 100 90 $ 100

Suspense Account 1996 Dec 31 Difference per trial balance 10 $

How To Show a Suspense Acco unt on the Balance Sheet

Debit Balance of the Suspens e Account

T form Balance Sheet $ Fixed Assets Current Assets Suspense Account X X X X

Vertical form Balance Sheet $ Fixed Assets Current Assets Less Current Liabilities Working Capital Suspense Account X X X X X X $

Credit Balance of the Suspen se Account

T form Balance Sheet $ Capital Current Liabilities Suspense Account X X X X X Long-term Liabilities

Vertical form
Balance Sheet $ Fixed Assets Current Assets Less Current Liabilities Working Capital Suspense Account X X X X (X) X $

Correction of Errors
To

correct the errors, students should m ake correcting entries in the ledger acco unts first, and hence clear the suspense accounts.

Example
A credit sale of $150 to Mr Chan has been omitted from his account.
Original entry: Dr Mr Chan $150 Cr Sales $150 Wrong entry: Dr Cr Sales $150 Correct entry: Dr Mr. Chan $150 Cr Suspense $150

Example
A sale to C. Lee for $230 was correctly entered in the sales book but entered in C. Lees account as $320.
Original entry: Dr C Lee $230 Cr Sales $230 Wrong entry: Dr C Lee $320 Cr Sales $230 Correct entry: Dr Suspense $90 Cr C Lee $90

Example
A credit sale of $97 has been credited to H. Cheungs account.
Original entry: Dr H Cheung $97 Cr Sales $97 Wrong entry: Cr H Cheung $97 Cr Sales $97 Correct entry: Dr H Cheung (97*2) 194 Cr Suspense $194

Example

Sales day book was overcast by $200.

$200 $200

Correct entry: Dr Sales Cr Suspense

Example

Sales day book was undercast by $40.

$40 $40

Correct entry: Dr Suspense Cr Sales

Correction of Errors
A single

entry in the suspense account. This occurs when errors are made in extracting balances, rather than in the recording phase.

Example

The total of the sales account of $1,500 has been omitted from the trial balance.
$1500

Correct entry: Dr Suspense

Example

The total of the sales account of $1,500 has been extracted as $1300 in the trial balance.
Correct entry: Dr Suspense $200

Example

The total of the sales account of $1,500 has been extracted to the debit column of the trial balance.
Correct entry: Dr Suspense (1500*2) $3000

End Of Lecture

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