Suspense account and correction of errors
Meridian Components Ltd's draft profit for the year ended 31 December 20X4 is £86,400. The trial balance debit total exceeded the credit total by £1,260 and the difference was posted to a suspense account. Investigation found: (1) a receipt of £1,260 from a customer was entered in the cash book only; (2) a sales invoice for £5,400 was completely omitted from the sales day book; (3) machinery costing £8,000, purchased on 1 January 20X4, was debited to repairs; (4) electricity for the quarter to 31 December 20X4, £1,900, was not recorded; (5) a customer owing £700 was declared bankrupt before the year end and the debt has not been written off. The company depreciates machinery at 20% per annum on cost with a full year's charge in the year of acquisition. No depreciation has yet been recorded on the new machinery. The finance director wants the revised profit and the corrected receivables figure before the financial statements are approved.
1. Prepare the correcting journal entries, including the entry to clear the suspense account, and explain why the suspense account arose.
Read the worked answer
The suspense account arose because the trial balance did not balance. The missing credit for the customer receipt means debits exceeded credits by £1,260, so the suspense account has a credit balance of £1,260.
| No. | Entry | Debit £ | Credit £ |
|---|---|---|---|
| 1 | Dr Suspense; Cr Trade receivables | 1,260 | 1,260 |
| 2 | Dr Trade receivables; Cr Sales | 5,400 | 5,400 |
| 3 | Dr Machinery; Cr Repairs | 8,000 | 8,000 |
| 3 | Dr Depreciation expense; Cr Accumulated depreciation | 1,600 | 1,600 |
| 4 | Dr Electricity; Cr Accruals | 1,900 | 1,900 |
| 5 | Dr Irrecoverable debt expense; Cr Trade receivables | 700 | 700 |
Entry 1 clears the suspense account. Entry 2 corrects an omission that did not affect the trial balance because both sides were missing. Entry 3 corrects a capital/revenue error that also did not affect the trial balance, because the bank credit was already recorded. Entry 4 records an accrual. Entry 5 writes off a bad debt.
2. Calculate the revised profit for the year and the net effect on trade receivables.
Read the worked answer
Revised profit:
| Item | £ |
|---|---|
| Draft profit | 86,400 |
| Omitted sales | 5,400 |
| Machinery removed from repairs | 8,000 |
| Depreciation on machinery | (1,600) |
| Electricity accrual | (1,900) |
| Irrecoverable debt | (700) |
| Revised profit | 95,600 |
Effect on trade receivables:
| Item | £ |
|---|---|
| Omitted sales invoice | +5,400 |
| Customer receipt not credited to receivables | (1,260) |
| Bad debt written off | (700) |
| Net increase | +3,440 |
The receipt correction reduces receivables because the customer's account was never credited. The omitted invoice increases receivables. The bad debt removes an asset that is no longer recoverable. The revised profit is higher than the draft because the machinery correction and omitted sale outweigh the extra depreciation, accrual and bad debt.
3. Explain why errors 2 and 3 do not affect the suspense account, while error 1 does.
Read the worked answer
A suspense account exists only because the total debits and total credits in the trial balance are unequal. Error 1 is a one-sided entry: the debit in the cash book was made, but the credit to the customer's account was not. One side is missing, so the trial balance is out of balance and suspense is needed. Errors 2 and 3 are double-entry errors made on both sides. In error 2, both the debit to receivables and the credit to sales were omitted. In error 3, the wrong account was debited, but a debit of £8,000 and a credit of £8,000 were still recorded. In each case total debits still equal total credits, so no suspense arises. The errors still misstate profit and assets, which is why they must be corrected even though the trial balance balances.