2 Learning objectivesAfter you have studied this chapter, you should be able to:Explain why a suspense account may be usedCreate a suspense account in order to balance the trial balanceCorrect errors using a suspense accountRecalculate profits after errors have been correctedExplain why using a suspense account is generally inappropriate
3 Errors and the trial balance Occasionally there will be errors in the double entry bookkeeping that means the trial balance totals will not be equal. These errors could include:Incorrect additions in any accountMaking an entry on only one side of the accountsEntering a different amount on the debit side from the amount on the credit side
4 Suspense accountWhen the trial balance totals are not equal, an error exists.The double entry work should be checked to locate the error.If the error cannot be found, it is necessary to insert a suspense account to balance the trial balance.If the error is not found before the financial statements are prepared, the suspense account will be included on the statement of financial position as either a current asset or a current liability.
8 Activity (Continued)The trial balance on 31 December 2012 had a difference of £168. It was a shortage on the debit side. On 31 May 2013 the error was found. We had made a payment of £168 to K. Leek to close his account. It was correctly entered in the cash book, but was not entered in K. Leek’s account.
9 Activity (Continued)The trial balance on 31 December 2010 showed a difference of £77, being a shortage on the debit side. On 28 February 2011, all the errors from the previous year were found:A cheque of £150 paid to L. Kent had been correctly entered in the cash book but had not been entered in Kent’s account.The purchases account had been undercast by £20.A cheque of £93 received from K. Sand had been correctly entered in the cash book but had not been entered in Sand’s account.
13 The effect of errors on profits Some errors will mean that the original profit figures calculated will be wrong, while other errors will have no effect on the profits.It is errors that affect the accounts in the income statement that will affect a profit calculation – income and expense accounts.Errors affecting accounts that appear in the statement of financial position will not affect a profit calculation.
14 Errors which do not affect profit calculations On 1 November 2011 we paid £80 to a creditor T. Monk. It was correctly entered in the cash book but not entered anywhere else. The error was identified on 1 June 2012.
15 Errors which do not affect profit calculations (Continued) Both these accounts appear in the statement of financial position and so the profit figure is not affected.
16 Errors which do affect profit calculations On 1 June 2012, it was established that the rent account was undercast by £80.
17 Errors which do affect profit calculations (Continued) The rent figure has been increased by £80 which reduces net profit by £80.
18 Learning outcomes You should have now learnt: How to make the appropriate entries in setting up a suspense accountHow to make the correcting entries involving the suspense account when the cause of an error is identifiedThat some errors may cause the profits originally calculated to have been incorrect
19 Learning outcomes (Continued) That errors that do not affect profit calculations will have an effect only on items in the statement of financial positionThat nowadays suspense accounts very rarely need to be used, if at all