SUSPENSE ACCOUNTS AND ERROR CORRECTION
Suspense accounts and error correction are popular topics for examiners because they test understanding of bookkeeping principles so well
A suspense account is a temporary resting place for an entry that will end up somewhere else once its final destination is determined. There are two reasons why a suspense account could be opened:
- A bookkeeper is unsure where to post an item and enters it to a suspense account pending instructions
- There is a difference in a trial balance and a suspense account is opened with the amount of the difference so that the trial balance agrees (pending the discovery and correction of the errors causing the difference). This is the only time an entry is made in the records without a corresponding entry elsewhere (apart from the correction of a trial balance error – see error type 8 in Table 1).
Types of error
Before we look at the operation of suspense accounts in error correction, we need to think about types of error – not all types affect the balancing of the records and hence the suspense account. Refer to Table 1.
Table 1: Types of error
|Error type||Suspense account involved?|
|1 Omission – a transaction is not recorded at all||No|
|2 Error of commission – an item is entered to the correct side of the wrong account (there is a debit and a credit here, so the records balance)||No|
|3 Error of principle – an item is posted to the correct side of the wrong type of account, as when cash paid for plant repairs (expense) is debited to plant account (asset)
(errors of principle are really a special case of errors of commission, and once again there is a debit and a credit)
|4 Error of original entry – an incorrect figure is entered in the records and then posted to the correct account
Example: Cash $1,000 for plant repairs is entered as $100; plant repairs account is debited with $100
|5 Reversal of entries – the amount is correct, the accounts used are correct, but the account that should have been debited is credited and vice versa
Example: Factory employees are used for plant maintenance:
Debit: Plant maintenance
Credit: Factory wages
Easily done the wrong way round
|6 Addition errors – figures are incorrectly added in a ledger account||Yes|
|7 Posting error
a. an entry made in one record is not posted at all
b. an entry in one record is incorrectly posted to another
Examples: cash $10,000 entered in the cash book for the purchase of a car is:
a. not posted at all
b. posted to Motor cars account as $1,000
|8 Trial balance errors – a balance is omitted, or incorrectly extracted, in preparing the trial balance||Yes|
|9 Compensating errors – two equal and opposite errors leave the trial balance balancing (this type of error is rare, and can be because a deliberate second error has been made to force the balancing of the records or to conceal a fraud). Yes, to correct each of the errors as discovered||Yes, to correct each of the errors as discovered|
For examination purposes we are more often concerned with the second of these – differences and error correction.
Errors 1 to 5, when discovered, will be corrected by means of a journal entry between the accounts affected. Errors 6 to 9 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 records. Type 8, trial balance errors, are different. As the suspense account records the difference, an entry to it is needed, because the error affects the difference. However, there is no ledger entry for the other side of the correction – the trial balance is simply amended.