As noted previously, unlike a manual accounting system where an unbalanced journal may lead to the automatic creation of a suspense account (usually at the trial balance stage of preparing financial statements), in a computerised accounting system a suspense account will be purposefully created by the bookkeeper before they discover the correct accounting treatment.
Correcting errors
The errors which do not involve a suspense account will, when discovered, be corrected by means of a journal entry between the ledger accounts affected. The errors which do involve a suspense account will also require journal entries to correct them, but one side of the journal entry will be to the suspense account opened for the difference in the accounting records.
The following illustrative example is not representative of what you would be asked to do in the exam but should help to give you a better understanding of how errors might occur and how they can be investigated and corrected.
An illustrative example
Michelle runs a small business and does her own bookkeeping but does not have very much experience in this yet. There have been times throughout the year when Michelle has used a suspense account because she was unsure of the correct accounting treatment. She also thinks there may be other errors which occurred that did not involve a suspense account. The business has a year end of 30 September 20X8.
On preparing her trial balance, Michelle discovered that there was a credit balance of $1,010 in the suspense account.
On investigation of the accounting records, the following errors and omissions were discovered:
1. Sales returns for goods sold on credit in September 20X8 of $8,980 were accidentally recorded by processing a sales invoice.
2. Whilst performing a bank reconciliation, Michelle discovered a payment in the bank statement for $120 which was made on 1 September 20X8. At first, Michelle did not recognise the amount so she included this in her accounting records by debiting the suspense account and crediting the bank account. On investigation, she discovered that it was a direct debit for a subscription to an IT support service. The payment relates to IT support services which Michelle will make use of from 1 September 20X8 to 31 August 20X9.
3. On 1 September 20X8, Michelle made a purchase of $3,500 for which she was entitled to a settlement discount of $70 if the invoice was paid within 30 days. On settling the invoice on 17 September 20X8, the cash paid of $3,430 was recorded correctly and the trade payables balance was reduced by this amount. Michelle realised that the remaining balance of $70 was no longer due to be paid so recorded:
Dr Trade payables
|
$70
|
|
Cr Suspense account
|
|
$70
|
4. On 30 September 20X8, Michelle calculated that she had prepaid $580 of insurance for the next 12 months. She recorded the prepayment as:
Dr Insurance
|
$580
|
|
Dr Prepayments
|
$580
|
|
Cr Suspense account
|
|
$1,160
|
5. On 1 September 20X8, Michelle had a balance outstanding owed to one of her suppliers of $400. That supplier also had a balance outstanding owed to Michelle of $500. Michelle and the supplier agreed to settle the balance owed to Michelle through a contra entry. To record this, Michelle processed a journal entry to remove both the $400 trade payable and $500 trade receivable and posted the difference to the suspense account.
6. Bank charges for the year of $115 have been omitted from the accounting records.
Required
Explain how each of the above errors and omissions has impacted the accounts, prepare any journal entries necessary to correct them and illustrate the impact of these corrections on the suspense account where applicable.
Solution
Error correction:
1. Sales returns should have been debited to the sales returns account and credited to trade receivables, but instead a sales invoice has been recorded which would have increased revenue and increased trade receivables. This means that the trade receivables account will now be overstated by $17,960 ($8,980 x 2) because, rather than reducing trade receivables by $8,980, Michelle has increased it by $8,980. There was no suspense account entry here and Michelle should use the following journal entry to correct the error:
Dr Revenue
|
$8,980
|
|
Dr Sales returns
|
$8,980
|
|
Cr Trade receivables
|
|
$17,960
|
To correct the sales returns entry
|
2. The IT support services span a period of 12 months from 1 September 20X8, which means that one month of this payment should be expensed in the year ended 30 September 20X8 and the remainder should be recorded as a prepayment:
Dr IT expenses ($120 x 1/12)
|
$10
|
|
Dr Prepayment ($120 x 11/12)
|
$110
|
|
Cr Suspense account
|
|
$120
|
To record IT expense and prepayment for IT services
|
3. Where a company is entitled to a settlement discount, the amount paid to settle the invoice will be less than the trade payable balance initially recorded. The difference will relate to the discount received which should be recorded as a credit to the statement of profit or loss. Since the discount received was effectively posted to the suspense account, the following adjustment is required:
Dr Suspense account
|
$70
|
|
Cr Discounts received
|
|
$70
|
To record settlement discount received in September 20X8
|
4. It appears that Michelle did not realise that the prepaid insurance expense should be credited to the insurance expense account. This account will now be overstated by $1,160 ($580 x 2). To correct the error, Michelle should post the following journal entry:
Dr Suspense account
|
$1,160
|
|
Cr Insurance
|
|
$1,160
|
To include the missing insurance prepayment brought forward
|
5. The contra entry should only have been made for the lower amount of $400 as Michelle’s customer will still owe her $100 ($500 - $100). The trade receivables balance of $100 should be reinstated in the accounting records and the suspense account removed through the following journal entry:
Dr Trade receivables
|
$100
|
|
Cr Suspense account
|
|
$100
|
To reinstate the trade receivables balance due
|
6. The bank charges for the year of $115 represent a complete omission from the accounting records. There is no suspense account involved and instead the accounts should simply be updated through the following journal entry:
Dr Bank charges
|
$115
|
|
Cr Bank
|
|
$115
|
To reinstate the trade receivables balance due
|
The effect of the above correcting entries on the suspense account can be visualised in the form of a T-account: