The Suspense Account That Would Not Clear
Kabelo keeps the books of a small hardware store. On 31 March his trial balance totals were P184,620 debit and P185,100 credit, so he opened a suspense account with the P480 difference. During April he found the following: (i) a credit sale of P1,250 to M. Sithole had been entered in the sales day book but posted to the wrong side of Sithole's account; (ii) the purchase returns day book was overcast by P300; (iii) a payment of P760 for rent had been correctly entered in the cash book but not posted to the rent account; (iv) a credit note of P90 issued to a customer had been completely omitted from the books. Kabelo says the suspense account should now clear exactly.
1. Determine the corrected suspense account balance after each of the four items, showing whether each item increases or reduces the original P480. State whether Kabelo's expectation is correct.
Read the worked answer
Start: suspense account credit balance P480 (since credits exceeded debits).
(i) Sale of P1,250 posted to the wrong side of Sithole's account: the debit side is short by P1,250 and the credit side is overstated by P1,250, so the imbalance grows by 2 x P1,250 = P2,500. Suspense must be debited P2,500, increasing the credit balance to P2,980.
(ii) Purchase returns overcast by P300: returns are credited, so credits are overstated by P300; debit suspense P300. Balance now P3,280 credit.
(iii) Rent of P760 not posted: a debit is missing, so debit suspense P760. Balance now P4,040 credit.
(iv) Credit note of P90 wholly omitted: this is a complete omission - both debit and credit are missing, so the trial balance still balances and suspense is untouched. Balance remains P4,040 credit.
Kabelo is wrong: after correcting these errors the suspense account carries a P4,040 credit balance, not nil. Only one-sided errors affect suspense, and the wrong-side posting counts twice. A remaining balance means further errors exist; it must be investigated, not simply written off.
2. Explain why item (iv) does not affect the suspense account even though it changes the financial statements, and state the net effect of all four corrections on profit.
Read the worked answer
A credit note records a return inward: it is debited to returns inwards and credited to the customer's account. Omitting both entries leaves the ledger internally consistent - every debit still has a matching credit - so the trial balance still balances and the suspense account is unaffected. The error is only revealed by comparing the ledger with source documents or the receivables ledger.
Effect on profit: (i) has no profit effect; the sale was already recorded, only the personal account was misposted. (ii) Purchase returns overstated by P300 means returns were too high, so profit is understated by P300 - correction increases profit by P300. (iii) Rent of P760 omitted means an expense is missing, so profit is overstated by P760 - correction reduces profit by P760. (iv) Returns inwards of P90 omitted means the deduction from sales is missing, so profit is overstated by P90 - correction reduces profit by P90.
Net effect on profit: +300 - 760 - 90 = -P550, i.e. profit falls by P550. Note that the suspense account and the profit correction are independent consequences of the same errors.