1. Correction of Errors Suspense Account

2. Popular Exam Topic
We were introduced to the concept of a trial balance, which is a list of balances relating to Statement of Profit and Loss and Statement of Financial Position Accounts as at a certain date. Because every debit should have an equal credit, the Trial Balance in theory should always balance
However when the Trial Balance does not balance, an error has occurred and a way of temporarily making the Trial Balance balance, is to insert a Suspense Account balance, which will force the Trial Balance to balance – The preceeding is the Subject of this Lecture

3. Types of Errors
Errors which do not affect the Balancing of the Trial Balance
Error of Omission – A transaction has been completely omitted from the Double entry system and in turn the accounting records
Error of Commission – A transaction has been recorded in the correct category of account, but in the wrong account e.g. A fixture and Fittings recorded in the Motor Vehicles Non Current Asset Account
Error of Principle – Where the transaction is recorded in completely the wrong category of account e.g. Purchase of Non Current Asset debited to Repairs Expense Account
Compensating Errors – This type of error occurs when two or more transactions have been recorded incorrectly, but by chance they are incorrect by the same amount and cancel each other out -
Error of Original Entry – The original transaction is entered with the incorrect amounts

4. Errors which do not affect the Balancing of the Trial Balance
Reversal of Entries Error – This error arises where the double entry is correct in every respect other than the fact that the debit and credit are posted the wrong way round –
Memory Aid : “ECO CROP” to remember errors which do not affect the Trial Balance.

5. Approach to Correction of Errors
1) Always take Note of What Double Entry has taken place (What did Happen)
2) Then Determine what the double entry should have been (What Should have Happened)
3) Then work out the Correcting Journal and Include a Narrative
(Correction)
Note: Clearly identify and segregate steps 1 to 3 above in your answer

6. Types of Errors
Errors which do affect the Balancing of the Trial Balance (A suspense account is needed for these errors)
Same Sided Entry Error – This error occurs when two entries have been made to the same side for example, two debit entries instead of a debit and a corresponding credit –
Single Sided Entry Error – This error occurs when a debit entry has been made but there is no corresponding credit entry and vice versa –
Transposition Error – This error will arise where 2 numbers within a balance are reversed when entering a transaction into the ledgers – e.g. A debit of €68 was posted to a nominal ledger account and a credit entry was posted for €86 –

7. SUSPENSE ACCOUNT –
When the debits do not equal the credits at the trial balance stage, we open a suspense account – The suspense account is opened by entering a balance in the account, such that if the suspense account is added to the trial balance, the total debits and credits will be equal
Note: The suspense account is only opened temporarily until sufficient information is available for the bookkeeper to post the correcting entries to the ledger accounts

8. CLEARING THE SUSPENSE ACCOUNT TO NIL
Having Identified the error, note the entries that have been completed
Identify what type of error it is ? Does it affect the Suspense Account?
Identify what the correct entries should have been
Correct the error by completing either a journal entry or by recording the correcting entry through the suspense account

9. Adjustment to Profit Arising From Correcting Entries
If the correction of errors involves debiting/crediting Statement of Profit and Loss items, then there may be an effect on profit/loss
Any Statement of Financial Position debit and credit entries will have no impact on profit and loss
If both the matching debit and credit entries are in the Statement of Profit and Loss, then there is no impact on profit and loss
But, if there is a debit to the Statement of Profit and Loss only, this will reduce profit/increase loss
And if there is a credit to the Statement of Profit and Loss only, this will increase profit/reduce loss

10. Balance on the Suspense Account
The Balance on the Suspense Account is a Statement of Financial Position account,
A debit Balance = Current Asset
A Credit Balance = Current Liability