Nadia Joseph: Reconciling a Suspense Account and Correcting Profit
Nadia Joseph extracts her trial balance at 30 June. Debits total $186,400 and credits $189,390, and the difference is entered in a suspense account. While searching for the cause she finds the following: (1) equipment costing $4,500 bought for cash was debited to the purchases account; (2) a credit sale of $860 to J. Charles was completely omitted from the books; (3) discount allowed of $270 was entered in the discount allowed account but not in the customer's account; (4) rent of $1,800 paid by cheque was entered in the rent account as $1,080; (5) a cheque for $2,000 paid to a supplier was entered in the supplier's account but not in the cash book. Nadia's draft net profit is $41,700, and her policy is to depreciate equipment at 10% per annum on cost.
1. Identify which of the five errors affect the suspense account, stating the amount and the side (debit or credit) of each entry needed to clear it.
Read the worked answer
The credits exceed the debits by $2,990, so the suspense account was opened with a debit balance of $2,990.
- Error (1) - no effect on suspense. Both accounts were debited, so total debits and credits still agree; the wrong account was used, not the wrong side.
- Error (2) - no effect. A complete omission removes a debit and an equal credit, so the trial balance is still in agreement.
- Error (3) - affects suspense, $270 credit. Only the debit was posted, so debits exceed credits by $270.
- Error (4) - affects suspense, $720 credit. Rent should be $1,800 but was posted at $1,080; the debit side is short by $720.
- Error (5) - affects suspense, $2,000 credit. The bank credit was never made, so credits are short by $2,000.
Total credits required: $270 + $720 + $2,000 = $2,990, exactly clearing the debit balance. This confirms the analysis.
2. Prepare the journal entries to correct errors (1), (3), (4) and (5).
Read the worked answer
| No. | Account to debit | Account to credit | $ |
|---|---|---|---|
| 1 | Equipment | Purchases | 4,500 |
| 3 | Suspense | Customer's account | 270 |
| 4 | Rent | Suspense | 720 |
| 5 | Suspense | Bank (cash book) | 2,000 |
Reasoning for each:
- (1) The asset account was never debited and purchases were wrongly debited. Remove the amount from purchases and put it where it belongs, so depreciation can be charged on it.
- (3) The expense is already correctly recorded. The customer must be credited so the receivable is reduced by the discount given.
- (4) Rent is understated by $720, so debit rent and credit the suspense account to supply the missing debit.
- (5) The supplier's account was correctly debited; the bank credit is missing, so credit the cash book and clear the suspense with a debit.
Note that correcting (5) reduces the bank balance, an item Nadia must check against her bank statement.
3. Calculate the corrected net profit and explain why error (3) does not change profit.
Read the worked answer
| Item | $ |
|---|---|
| Draft net profit | 41,700 |
| Add: purchases overstated (equipment wrongly debited) | 4,500 |
| Less: depreciation on equipment, 10% × 4,500 | (450) |
| Less: rent understated (1,800 − 1,080) | (720) |
| Corrected net profit | 45,030 |
Error (2) is omitted from this schedule on purpose: it understates both sales and debtors by $860, so profit should also rise by $860 if it is to be corrected - a point worth flagging to Nadia, since the question asks only about the listed corrections to the ledger as they stand.
Error (3) leaves profit untouched: the $270 discount allowed was correctly entered as an expense. Only the customer's account was left uncredited, so debtors are overstated by $270 while profit is correct. Not every error that misstates the statement of financial position misstates profit, and vice versa.