Suspense Account and Net Profit Corrections at Year End
At the year end of a trading business, the trial balance was extracted and, because the debit and credit columns differed, a suspense account was opened with a credit balance of ₹9,800. The accountant then found the following: (i) ₹7,000 received from a customer was entered correctly in the cash book but posted to the customer's account as ₹700; (ii) office equipment costing ₹45,000, purchased for cash, was debited to the Purchases account; (iii) a sales return of ₹8,000 was debited to the Sales account instead of to Sales Returns; (iv) discount received of ₹3,500 from a supplier was recorded in the supplier's account but not posted to the Discount Received account; (v) a credit sale of ₹12,000 to R. Mehta was posted to the account of R. Mehra. No depreciation has yet been recorded on the new equipment, which is to be depreciated at 10% per annum for a full year. Reported net profit before these corrections is ₹1,50,000.
1. State, with reasons, which of the five items affect the suspense account, and prepare the suspense account to show how it is cleared.
Read the worked answer
Only items (i) and (iv) affect the suspense account.
- (i) Cash was correctly debited with ₹7,000, but the customer was credited with only ₹700. Credits are short by ₹6,300, so the original difference included a credit of ₹6,300 in suspense. Correction: Dr Suspense ₹6,300; Cr Customer ₹6,300.
- (iv) The supplier was correctly debited, but Discount Received was not credited. Credits are short by ₹3,500, giving a further credit in suspense. Correction: Dr Suspense ₹3,500; Cr Discount Received ₹3,500.
- (ii), (iii) and (v) are complete double entries. Both sides were posted, so the trial balance still agreed; they are errors of principle or wrong personal account, not partial omissions.
| Suspense Account | Dr ₹ | Cr ₹ |
|---|---|---|
| Discount Received (iv) | 3,500 | - |
| Customer (i) | 6,300 | - |
| Balance b/d | - | 9,800 |
| Total | 9,800 | 9,800 |
The two omissions together exactly account for the ₹9,800 credit balance, so the account closes to nil.
2. Pass the journal entries needed to correct all five items, including depreciation.
Read the worked answer
| No. | Entry | Dr ₹ | Cr ₹ |
|---|---|---|---|
| (i) | Suspense A/c ... Dr; To Customer A/c | 6,300 | 6,300 |
| (ii) | Office Equipment A/c ... Dr; To Purchases A/c | 45,000 | 45,000 |
| (ii) | Depreciation A/c ... Dr; To Accumulated Depreciation A/c | 4,500 | 4,500 |
| (iii) | Sales Returns A/c ... Dr; To Sales A/c | 8,000 | 8,000 |
| (iv) | Suspense A/c ... Dr; To Discount Received A/c | 3,500 | 3,500 |
| (v) | R. Mehra A/c ... Dr; To R. Mehta A/c | 12,000 | 12,000 |
Reasoning on (ii): the purchase was a capital expenditure wrongly treated as revenue. Removing ₹45,000 from purchases raises profit, but the equipment must still bear depreciation of 10% × ₹45,000 = ₹4,500.
Reasoning on (iii): the original entry reduced Sales by ₹8,000. The correction restores Sales and instead increases Sales Returns by ₹8,000, so the two accounts are stated correctly.
3. Compute the corrected net profit and explain why one of the errors has no effect on profit.
Read the worked answer
| Item | Effect on profit ₹ |
|---|---|
| Reported net profit | 1,50,000 |
| (ii) Purchases no longer charged | +45,000 |
| (ii) Depreciation on equipment | −4,500 |
| (iv) Discount received omitted | +3,500 |
| (i), (iii), (v) | Nil |
| Corrected net profit | 1,94,000 |
Why (iii) has no profit effect: the wrong entry debited Sales with ₹8,000, reducing gross profit by ₹8,000. The correct entry debits Sales Returns with ₹8,000, which also reduces gross profit by ₹8,000. The total charge is the same; only the disclosure of Sales and Returns was wrong, not the profit.
Item (v) merely moves a debtor balance between two customers, and item (i) corrects a debtor balance, so neither touches profit.