Merrow Supplies: Suspense Account and Corrected Profit
You are the assistant accountant at Merrow Supplies Ltd, a wholesale business with a 31 December year end. The draft trial balance at 31 December 2024 shows debit balances of £184,260 and credit balances of £185,070. A suspense account has been opened with a £810 credit balance. The draft profit before tax is £36,400. Your investigations find: (1) a cheque of £1,260 paid to a supplier was entered in the cash book but not posted to the supplier's account; (2) bank charges of £90 were entered in the cash book but not posted to the bank charges account; (3) a credit note for £270 for goods returned by a customer was correctly entered in the sales returns account but was posted to the debit of the customer's account instead of the credit; (4) a sales invoice for £450 was completely omitted from the accounting records. The finance director wants to know whether the omitted invoice explains the suspense account and what the corrected profit is.
1. Explain why the omitted sales invoice does not explain the £810 suspense balance and calculate the corrected profit before tax. Justify each adjustment.
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Suspense account. A suspense account is a temporary account used when a trial balance does not agree. It holds the difference until errors are found and corrected. It is not a real asset or liability and must be cleared before financial statements are issued.
Why the omitted invoice is irrelevant to the £810. A complete omission of a sales invoice means neither the debit (receivable) nor the credit (sales) was recorded. Because both sides are missing by the same amount, the trial balance still balances. It affects profit and receivables, but it cannot create or explain a suspense balance.
Corrected profit. Draft profit £36,400. Add back the omitted sale £450 because sales were understated. Deduct the unposted bank charges £90 because expenses were understated. The supplier payment error affects only the supplier account and cash book; the payment was already recorded in the cash book, so profit is unaffected. The sales return was already correctly entered in the sales returns account; the misposting affects only the customer account, so profit is unaffected. Corrected profit = 36,400 + 450 − 90 = £36,760. Clearing the suspense account itself has no profit effect.
2. Prepare the journal entries to correct items (1) to (3) and show how the suspense account is cleared. Calculate the corrected receivables balance if receivables before corrections were £48,000.
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Journals.
| No. | Account to debit | Account to credit | Amount |
|---|---|---|---|
| 1 | Supplier personal account | Suspense account | £1,260 |
| 2 | Bank charges expense | Suspense account | £90 |
| 3 | Suspense account | Customer personal account | £540 |
Suspense account. Opening credit balance £810. Debits for items (1) and (2): £1,260 + £90 = £1,350. Credit for item (3): £540. Total credits £810 + £540 = £1,350, so the account clears to nil. Item (3) needs £540 because the customer account was wrongly debited by £270; correcting it requires removing that debit and recording the correct credit of £270, a total credit of £540.
Corrected receivables. Start £48,000. Item (3) reduces receivables by £540 (from a debit balance wrongly created to a credit balance). Item (4) increases receivables by £450 because the sale had been omitted. Corrected receivables = 48,000 − 540 + 450 = £47,910. Items (1) and (2) do not affect receivables.
3. The finance director suggests ignoring the £90 bank charges because they are immaterial. Assess whether this is acceptable, referring to accounting principles and the effect on the suspense account.
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Materiality is not a licence to leave known errors uncorrected. Materiality permits summarising or omitting information that is not significant to users, but it does not justify recording a transaction in the wrong account or leaving a known misstatement in the ledger. The £90 is small in profit terms, but the cash book already records the payment, so the bank reconciliation and the ledger would disagree. The bank charges account would be understated and the suspense account could not be cleared properly.
Suspense account effect. The £90 is one of the identified reasons for the £810 credit balance. If it is ignored, the suspense account will not clear to nil and the trial balance will still not agree. A suspense account cannot remain in the final financial statements, so the error must be corrected.
Practical response. Record the £90, clear the suspense account and disclose the correction if it is material in aggregate with other errors. Immaterial known errors should still be corrected in the accounting records; materiality affects presentation and disclosure, not the integrity of the double-entry system.