Errors in accounts & suspense accounts

ERRORS ON ACCOUNTS

There are two types of errors in accounts:

·         Errors that don’t affect the trial balance

·         Errors that affect the trial balance

Errors that don’t affect the trial balance

The trial balance produced from the accounts appears to be okay/correct, i.e the debits are the same as the credits.  However, on taking a close check on the balances and transactions posted, errors may have been made and therefore the balances shown on the trial balance may be incorrect i.e. under/over stated.

There are 6 main types of errors that don’t affect the trial balance if made on both accounts. i.e a debit and a credit entry.

These are explained as follows:

a)      Error of omission

Here, a transaction is completely omitted from the accounts and therefore the double entry is not made at all. e.g. a sales invoice of $.40,000 is not posted in the sales daybook therefore no entry is made in the receivables’ control account and the sales account i.e. both debit of $.40,000 in Receivables’ control account and credit of $.40,000 in the sales account are not made.

The effect of the error is that it understates both the receivables and the sales.

To correct this error, the transaction is posted in the books by:

Debiting Receivables               $.40,000

Crediting sales                                         $.40,000

b)     Error of Commission

This error occurs when a transaction is posted to a wrong account but the account is of the same class.  Example: a credit sale to T. Brown is posted to L. Brown account for an amount of $.20,000.  Instead of a debit to T. Browns’ account it is made to L.Browns’ account and the corresponding credit in the sales account is correct.

Although the debit entry is made into the wrong account, the two accounts are of the same class i.e. debtors/ Receivables.

To correct this error atransfer is made from L. Browns’ account to T. Browns’ by:

                                                                                    $.                        

                   (i)            Debit T. Browns’ a/c                       20,000

                 (ii)            Credit L Browns’ a/c                                       20,000

c)      Error of principle

In this type of error a transaction is posted not only to the wrong account but also of a different class. i.ebreaking the rules of an accounting principle or concept. e.g. Motor vehicle purchased for $.400,000 is posted to the motor vehicle expenses a/c.  (Instead of debiting motor vehicles, we debited motor vehicle expenses a/c and the credit entry in the cashbook is correct)

The motor vehicles account is a non-current asset, and motor vehicles expenses a/c is an expense account.  Therefore a capital expenditure has been posted as revenue expenditure.

To correct this error a transfer is made from the motor expenses account to the motor vehicles a/c by:

                                                                                       $      

                               (i)            Debit Motor vehicles a/c         400,000

                             (ii)            Credit Motor expenses a/c                       400,000

d)     Complete reversal of entries

A transaction is posted to the correct accounts but to the wrong sides of the accounts i.e. a debit is posted as a credit and a credit is posted as a debit.  Example: cash drawn from the bank of $.15,000 for business use is posted as a debit in the bank account and credit in cash in hand.

To correct this error, two entries are made in the relevant accounts:

                   (i)            Correct the error

                 (ii)            Post the transaction correctly

The entries will therefore be as follows:

                   (i)            Debit Cash in hand by     $.15,000

Credit bank by                                 $.15,000

To correct the error of $. 15,000 posted in the wrong sides of these account

                 (ii)            Debit cash by                  $.15,000

Credit bank by                                 $.15,000

To post the entries correctly

e)      Error of Original entry

Here a transaction is posted to the correct accounts but the amount posted is not correct i.e. it is either under/over stated.  In some cases, this is known as a transposition error e.g. cash received from a debtor of $.98,000 is credited/posted to the customer’s account as $.89,000.

To correct this error, the amount understated or overstated is posted to these accounts to reflect the correct balance.  In this case, we will:

                                                                                  $.                          

Debit cash book                                      9,000

Credit debtors                                          9,000

f)       Compensating Errors

These are errors that tend to cancel out each other i.e. if the effect of one error is to understate the debits or credits then another error may take place to overstate the debits or credits by the same amount, hence canceling out each other. E.g. if the balance c/d of the purchases a/c is $.398,000 but shown in the trial balance as $.389,000 and another error carried to the trial balance of fixture amounting to $.454,000 instead of $.445,000:

                                                  $.

Purchases                                398,000

                                                389,000

                                                  (9,000)

                                               

   $.

Fixtures                                   445,000

                                (454,000)

                                                   9,000

This type of error is corrected by use of a suspense account.

g)      Slide error

e.g, a credit sale of S13,000 is written as $130.00. the effect will be to understate sales and receivables by $12,870.

To correct the error, Dr. Receivables                       12,870

                                 Cr. Sales                                                 12,870

Illustration 1

Give the journal entries needed to record the corrections of the following.  Narratives are required.

a)        Extra capital of $. 10,000 paid into the bank had been credited to Sales account.

b)       Goods taken for own use $.700  had been debited to General Expenses.

c)        Private insurance $. 89 had been debited to Insurance account.

d)       A purchase of goods from C Kelly  $.857 had been entered in the books as $.587.

e)        Cash banked $. 390 had been credited to the bank column and debited to the cash column in the cashbook.

f)        Cash drawings of $. 400 had been credited to the bank column of the cashbook.

g)       Returns inwards $. 168 from M Mardock had been entered in error in J Mardock’s account.

h)       A sale of a motor van $. 1,000 had been credited to Motor Expenses.

 

Errors That Affect The Trial Balance And The Suspense Account

These types of errors are reflected on the trial balance because the debits will not be same as the credits.  The debits may be more than the credits and vice versa.

Examples include:

1.        Transaction is posted on one side of the accounts only i.e. only a debit entry or a credit entry. (omission error on one account)  Example cash received from a debtor is debited to the cashbook and no other entry is made in the account, i.e. no credit entry on the debtor’s a/c.

2.        A transaction is posted on one side of both the accounts i.e. two debits or two credits.  Example a payment to a creditor of Ksh.30,000 is credited in the cashbook and also credited in the creditor’s accounts.

3.        A transaction is posted correctly but different amounts i.e. debit is not the same as the credit.  Example – cash received from a debtor of Ksh.45,000 is debited in the cashbook as Ksh.45,000 and credited as Ksh. 54,000 in the debtor’s a/c.

4.        Error on balances of accounts – i.e. understatement or overstatement of an account balance due to mathematical errors.

5.        Balance on an account is shown on the wrong side of the account when opening the ledger accounts or when taken up to the trial balance.  Example Bal c/d in the cash book for cash at bank of Ksh. 200,000 is shown as a credit i.e. an overdraft, instead of a debit in the trial balance.  The balance may also be brought down as an overdraft instead of a debit balance in the trial balance.

6.        A balance is omitted from the trial balance on the accounts in total.

To correct the above errors, the appropriate or the adjusting entries are made through an account called a suspense account.

The difference in the accounts is posted to this account and the entries to correct the accounts are posted here.  The balance to be shown on the suspense accounts depends on which side the error is shown on the trial balance.

If the debits > credits, then an amount is included on the credit side of the trial balance so that the debits = credits.  This is a credit balance and will be taken to the suspense account on the credit side.

Example:

                                                                DR                          CR

                Total                                        24,000                     20,000

                Suspense                                 -                                 4,000

                                                                24,000                     24,000

                                 Suspense a/c

	Ksh		Ksh
		Difference as per T/B	4,000

If the credits are more than the debits this is a debit balance and therefore we require an amount to be added to the total of the debits for the two sides to be same.  This debit balance is posted to the debit side of the suspense a/c.

DR                          CR

                Total                                        26,000                     30,000

                Suspense                                 4,000                       -

                                                                30,000                     30,000

                                             Suspense a/c

	Ksh		£
Difference as per T/B	4,000

Posting the correct entries should eliminate the balance on the suspense account.

In some cases, after checking for all errors that can affect the trial balance, the suspense a/c has a balance.  This balance depends on whether it is a credit or debit and whether it is material or not for purposes of proper accounting treatment. The following is the recommended approach:

Balance	Material	Not Material
Debit	Show as an asset (eg) other debtors	Charge in P& L as an expense
Credit	Show as a liability (eg) other creditors	Report as income in P&L

USES OF SUSPENSE ACCOUNT

i)         When the trial balance does not balance (eg due to transposition, commission or omission errors made on one account only – discussed above)

ii)       When a bookkeeper does not know where to post one side of a transaction. Eg when a business receives cash banked directly to the bank from a source which is unknown: Dr. Cashbook; Cr. Suspense A/c. eventually, when the cheque is confirmed it was from a debtor: Dr.suspence A/c; Cr. Receivables a/c.

N/B: suspense accounts are only temporary. Postings to suspense account are only made when the bookkeeper doesn’t know yet what to do, or when an error has occurred. Mysteries must be solved, and errors must be corrected. Under no circumstances should there still be a suspense account when it comes to preparing the statement of financial position of a business. The suspense account must be cleared and all the correcting entries made before the final accounts are drawn up.

Illustration1

A bookkeeper extracted a trial balance on 31 December 2012 that failed to agree by Ksh.330,000, a shortage on the credit side of the trial balance.  A suspense account was opened for the difference.

In January 2013 the following errors made in 2012 were found:

       (i)            Sales daybook had been undercast by Ksh.100,000.

     (ii)            Sales of Ksh.250,000 to J Chumo had been debited in error to J Chuma account.

    (iii)            Rent account had been undercast by Ksh.70,000.

    (iv)            Discounts received account had been under cast by Ksh.300,000.

     (v)            The sale of a motor vehicle at book value had been credited in error to Sales account Ksh.360,000.

You are required to:

a)        Show the journal entries necessary to correct the errors.

b)       Draw up the suspense account after the errors described have been corrected.

c)        If the net profit had previously been calculated at Ksh.7,900,000 for the year ended 31 December 2002, show the calculations of the corrected net profit

EFFECT OF AN ERROR ON NET PROFIT AND TOTAL ASSETS

In some cases, the correction of an error might have an effect in the net profit (in the income statement) or net assets (in the Statement of Financial Position). i.e increase or decrease Net profit and net assets.

Illustration3

On 31 December 2011, an inexperienced bookkeeper working for Wanji, a sole trader extracted a trial balance.  Due to errors committed by the bookkeeper, the trial balance failed to balance by Sh 369,400.  He placed the difference in a suspense account as shown below:

Wanji trial balance as at 31 December 2011

	Sh	Sh
Non-current Assets – cost	832,000
Stocks:
1 January 2011	148,000
31 December 2011		98,800
Trade debtors		76,000
Prepayments		10,000
Trade creditors	34,600
Bank overdraft		15,200
Accruals		16,000
Drawings	359,600
Capital		1,054,000
Sales	1,043,200
Provision for depreciation		166,400
Purchases		733,000
Operating expenses	126,000
Provision for doubtful debts		3,800
Discounts received	5,000
Discounts allowed		5,800
Suspense account	________	369,400
	2,548,400	2,548,400

Investigations carried out after preparing the above trial balance detected the following errors:

1.          The total of the sales daybook for December 2011 was overcast by Sh 25,700.

2.          On July 2011, the business purchased office equipment for Sh 40,000.  These were debited to purchases account.  Depreciation on the equipment is at the rate of 10% per annum on cost and based on the period (months) of usage in the year.

3.          A payment to a creditor by cheque of Sh. 8,500 was erroneously credited to the creditor’s account.

4.          A payment of Sh. 4,500 for telephone expenses was debited to telephone account as Sh 5,400.

5.          An amount of Sh 15,000 received from a debtor was not posted to the debtor’s account from the cashbook.

6.          Purchases daybook for October 2011 was under cast by Sh 28,000.

Assume the business had reported a net profit of Sh 85,800 before adjusting for the above errors.

Required:

(a)        The adjusted trial balance and the correct balance of the suspense account.   (6 marks)

(b)        Journal entries to correct the errors (Narrations not required)                                       (6 marks)

(c)        Suspense account starting with the balance determined in the adjusted trial balance in (a) above.                                                                                                                                                                                        (4 marks)

(d)        The adjusted net profit for the year.                                                                                 (4 marks)