Suspense Account and Profit Correction After a Trial Balance Difference
The bookkeeper of a sole trader prepared a trial balance at 31 December 2024. Debit balances totalled €184,260 and credit balances €185,710, so the €1,450 difference was posted to a suspense account. Draft net profit was €28,400. Investigation found: (i) a credit sale invoice of €1,800 to R. Byrne had been completely omitted; (ii) a purchase of €2,400 from S. Ltd had been correctly entered in the purchases account but posted to S. Ltd's account as €4,200; (iii) discount allowed of €350 to a customer had been entered in the discount allowed account only; (iv) rent of €900 paid by cheque had been entered in both the rent account and the bank account as €90. The owner wants to know whether the suspense account can simply be written off against profit and which corrections change the draft profit.
1. Prepare the journal entries necessary to correct the four errors and to clear the suspense account. Show the suspense account balance before and after correction.
Read the worked answer
| Item | Journal entry | Dr € | Cr € |
|---|---|---|---|
| (i) Omitted sale | Dr R. Byrne; Cr Sales | 1,800 | 1,800 |
| (ii) Supplier overposting | Dr S. Ltd; Cr Suspense | 1,800 | 1,800 |
| (iii) One-sided discount | Dr Suspense; Cr Customer | 350 | 350 |
| (iv) Rent understated | Dr Rent; Cr Bank | 810 | 810 |
Suspense account
| Debit | € | Credit | € |
|---|---|---|---|
| Opening balance | 1,450 | Error (ii) | 1,800 |
| Error (iii) | 350 | ||
| Total | 1,800 | Total | 1,800 |
The opening suspense balance is a debit of €1,450 because total credits exceeded total debits by that amount. Error (ii) had made credits too high by €1,800, so its correction credits suspense. Error (iii) had made debits too high by €350, so its correction debits suspense. The account clears exactly. Error (i) and error (iv) are double-entry errors and therefore do not touch suspense.
2. Calculate the corrected net profit and explain why only some of the corrections affect profit.
Read the worked answer
| € | |
|---|---|
| Draft net profit | 28,400 |
| Add omitted credit sale | 1,800 |
| Less additional rent | (810) |
| Corrected net profit | 29,390 |
The omitted sale increases revenue and receivables, so profit rises by €1,800. The rent correction adds €810 of expense, so profit falls by €810. Error (ii) affects only the supplier account because the purchases account was already correct; profit is unchanged. Error (iii) affects only the customer account because the discount allowed account was already debited; profit is unchanged. Clearing suspense is not a profit transaction. The corrected profit is therefore €29,390, not the draft figure and not a figure adjusted by the €1,450 suspense balance.
3. The owner says the €1,800 omitted sale should be ignored because the customer has not yet paid. Respond, referring to the accruals concept and the effect on receivables.
Read the worked answer
The sale should not be ignored. Under the accruals concept, revenue is recognised when the goods or services have been supplied and the right to consideration arises, not when cash is received. The invoice was issued and the sale was made, so sales revenue and the debtor balance must both be increased by €1,800. Ignoring it would understate profit and understate receivables. If the item had instead been an omitted sales return of €1,800, the correction would reduce profit and reduce receivables, giving corrected profit of €28,400 − €1,800 − €810 = €25,790.