Suspense accounts and the correction of errors Many errors that are made will affect the trial

balance agreement. These errors will normally consist of: 1. Entering different amounts in both entries of the transaction. 2. Making two debit entries (or two credit entries) for a transaction. 3. Only entering one entry for a transaction. If any of these errors are made (one or more) then the trial balance totals will not agree. In this case, the errors should be located. However, this may take time - days, weeks or even months - the more errors that have been made, the longer their location will take. If the trial balance does not agree, then we would not be able draw up the profit and loss account and balance sheet correctly. As a part solution to this (finding the errors should always be a priority), a firm can, in effect, make the trial balance agree by entering the amount needed to make the two columns agree again. The difference between the two columns of the trial balance is filled with the creation of a new entry - this is entered in the suspense account.

Example
On 31 December 2007, the trial balance is drawn up for J Mickley. This is a summary of the trial balance: J Mickley - Trial Balance as at 31 December 2007 Total of all entries Dr 47,500 Cr 46,900

To allow us to construct the final account, we enter the amount, in this case, in the credit column, and the trial balance will now appear as follows: J Mickley - Trial Balance as at 31 December 2007 Total of all entries Suspense account Dr 47,500 47,500 Cr 46,900 600 47,500

The entry in the trial balance has to be represented by an account. Therefore, we will now open up a suspense account with a credit balance of 600. Suspense 2007 2007 Dec 31 Difference in trial balance 600

Normally, we would be now forced to make a debit entry in another accounts somewhere else in the ledgers. However, in this case we make no entry as there need for the credit entry in the suspense account must be the result of excess debit entries made, or shortages on the credit side elsewhere in the accounts - i.e. the mistakes that we are trying to locate. This balance will remain in the accounts until the errors have been located and corrected. If we assume that the error that had been made was that the capital account had been undercast by 600 then this would explain why we appeared to have shortage on the credit column. However, it is possible that the error was that a debit entry (e.g. purchases) had been overcast by 600.

Let us assume that the error in our example, was due to Motor vehicles being overcast by 600, then the procedure to correct this would be as follows: 1. Enter up the correction in the journal 2. Enter the amendment to correct the error 3. Enter the other half of the transaction in the suspense account. If the error affects the trial balance then one entry in the transaction needed to correct the error must be in the suspense account. The error is found on Jan 15, 2008 - the motor vehicles had been overcast by 600. A credit entry in this account will correct the errors. Therefore, a debit entry will be made in the suspense account. The Journal Details Suspense Motor vehicles Motor vehicles account overcast - now corrected Dr 600 Cr 600 -

Suspense 2008 Jan 15 Motor vehicles 600 2007 Dec 31 Difference in trial balance 600

Motor Vehicles 2008 2008 Jan 15 Suspense 600

Notice that once the errors have been corrected, the balance on the suspense account disappears. While a balance remains, we know that there must be at least one error remaining undetected which affect the agreement of the trial balance.

Example
Your bookkeeper extracted a trial balance on 31 December 2004 which failed to agree by 180, a shortage on the debit side of the trial balance. A suspense account was opened for the difference. In February 2005, the following errors, made the previous year, were found: 1. Goods purchased on credit from E Lewis of 230 was entered correctly in the purchases account but was entered in the personal account as 320. 2. Advertising paid for 115 by cheque had been completely omitted from the books 3. Discounts received of 80 cash was entered on the debit side of both accounts. 4. Purchases daybook had been undercast by 250.

Errors affecting profits

Once the errors have been corrected, the firm will need to reconsider if the net profit needs calculating again. There are no general rules we can infer from the type of error and whether profit is or is not affected. Let us use the previous example and take each error in turn: 1. This error does not affect profits as it is only in a personal account which is a balance sheet item. 2. We have missed out an expense of 115, therefore profits will be lower as a result. 3. Discounts received has been undercast by 160 and this will need adding on to the profits. 4. Purchases have been undercast which is an expense, therefore profit will be lower as result.

Example
Using the example, the net profit for 2005 was 1,780. This will need recalculating based on the errors mentioned above: Statement of corrected net profit for 2004 as at 28 February 2005 Net profit b/d Add: Discounts received Less: Advertising Purchases Correct net profit for 2004 115 250 1,780 160 1,940 365 1,575