Suspense Account II: Correction of Errors – SS2 Financial Accounting Lesson Note (First Term)

Correcting errors means finding how a transaction should have been recorded, how it was recorded, and what entries put it right. Errors that stop the trial balance from agreeing are corrected through the suspense account, which holds the trial balance difference until the errors are found. Errors that do not affect the trial balance are corrected without it.

Behavioural objectives

By the end of the lesson, students should be able to:

• state the steps involved in correcting an error;
• say whether an error affects the agreement of the trial balance;
• explain why an item on the wrong side of an account is corrected by twice the original amount;
• prepare journal entries to correct errors;
• prepare a suspense account showing the opening balance and the correcting entries.

What are the steps in correcting errors?

To decide how to correct an error, ask the following questions.

1. How should the transaction have been recorded?
2. How has the transaction been recorded?
3. What type of error has the bookkeeper committed? That is, will the error affect the agreement of the trial balance or not? This step shows whether the suspense account will be involved in the correction.
4. What entries are required to correct the error?

Points to remember when applying the steps

1. An item on the wrong side of an account must be corrected by an adjustment equal to twice the amount of the original error (once to cancel the error and once to place the item on the correct side of the account).
2. Some errors do not affect the double entry. An example is a debit balance of ₦850 on the Rent Account that is included in the trial balance as a debit balance of ₦650. To correct the error, a one-sided entry should be made in the journal and the Suspense Account. Such errors do not require to be corrected by debit and credit entries.

Worked example: correcting errors with a suspense account

Illustration

Kehinde extracted a trial balance from her ledgers on 31st December 2017. The trial balance totals were ₦23,884 (debit) and ₦24,856 (credit). She placed the difference in a Suspense Account. Later investigation into the accounts revealed the following:

1. The debit side of the Telephone Account had been overstated by ₦200.
2. An invoice sent to Adejumo for ₦240 had been completely omitted from the books.
3. A cheque for ₦124 received from Diligent Enterprises had been posted to the debit of their account.
4. The purchase of some office equipment for ₦1,180 had been debited to the Office Expenses Account.
5. Discounts received, ₦90, had been posted to the purchases ledger but not to the Discounts Received Account.
6. Rent paid, ₦800, had been credited to the Rent Receivable Account.
7. A refund of an insurance premium, ₦60, had been recorded in the Cash Book but no other entry had been made.
8. A purchase of office stationery, ₦220, had been debited to the Purchases Account in error.
9. A credit balance of ₦30 in the purchases ledger had been omitted from the list of balances extracted from the ledger. The total of the list had been included in the trial balance.
10. Goods returned to Ready Stores had been credited to the Ready Stores Account and debited to the Purchases Returns Account. The goods had cost ₦400.

Required

1. Prepare journal entries to correct the errors indicated above.
2. Prepare the Suspense Account showing the opening balance and the correcting entries.

General journal

Suspense account

Evaluation

1. List the four questions to ask when correcting an error.
2. Which of the ten errors in the illustration did not involve the Suspense Account?
3. Why is the correcting entry for Ready Stores ₦800 when the goods cost ₦400?
4. What is the total of the Suspense Account after the corrections are made?

Assignment

1. Explain, with the Rent Receivable entry in the illustration as your example, why an item posted to the wrong side of an account is corrected by twice the original amount.
2. State how the opening balance of the Suspense Account in the illustration was found.