Trial balance, correction of errors and suspense accounts
Purpose and limits
A trial balance lists every ledger balance to check that total debits equal total credits. It does not prove the books are correct: errors of omission, commission, principle, original entry, compensating errors and complete reversal of entries all leave the totals in agreement.
Errors that affect the trial balance
One-sided entries, wrong addition of a column, or transposing figures in one account only (P540 written as P450 in the debit column) make the trial balance disagree. The difference is placed in a suspense account so draft accounts can be prepared. Each error is then corrected through the journal, and the suspense balance should fall to nil.
Correcting errors
A correction needs a complete double entry. Where one side is already posted, the other side goes to suspense. Errors that do not affect the trial balance are corrected by debiting the account wrongly credited and crediting the account wrongly debited.
Traps
- Error of principle: capital expenditure treated as revenue, such as van repairs debited to the motor van account - wrong class of account.
- Error of commission: right class, wrong account, such as J Smith instead of J Smyth.
- Use a suspense account only when the trial balance actually fails to agree.
- Corrections can change profit; always state the effect - overstating an expense understates profit.
Worked example
Rent of P900 was entered in the rent account as P90. Rent has been understated by P810. Correction: debit rent P810, credit suspense P810. Profit falls by P810.