Suspense Account and Net Profit Effect of Six Discovered Errors
M/s Rohan Traders prepared its trial balance on 31 March 2024. The debit total exceeded the credit total by ₹5,500, and the difference was placed in a Suspense Account. Later scrutiny revealed: (i) the Sales Book was overcast by ₹6,000; (ii) discount allowed of ₹2,000 was not posted to the Discount Allowed Account; (iii) rent paid ₹1,500 was posted twice to the Rent Account; (iv) the Sales Returns Book was overcast by ₹1,000; (v) furniture purchased for ₹15,000 was passed through the Purchases Book; (vi) goods returned by a customer ₹4,000 were completely omitted from the books. The proprietor wants to know which errors affect the Suspense Account, what entries will correct them, and how the net profit is affected. He intends to finalise accounts without reopening all ledgers.
1. Identify which of the six errors affect the Suspense Account and pass the rectification entries for all six.
Read the worked answer
Errors (i) to (iv) are one-sided and affect Suspense. Errors (v) and (vi) are two-sided and do not affect Suspense.
- Sales Book overcast ₹6,000: Dr Sales A/c ₹6,000; Cr Suspense A/c ₹6,000.
- Discount allowed not posted ₹2,000: Dr Discount Allowed A/c ₹2,000; Cr Suspense A/c ₹2,000.
- Rent posted twice ₹1,500: Dr Suspense A/c ₹1,500; Cr Rent A/c ₹1,500.
- Sales Returns Book overcast ₹1,000: Dr Suspense A/c ₹1,000; Cr Returns Inward A/c ₹1,000.
- Furniture through Purchases Book ₹15,000: Dr Furniture A/c ₹15,000; Cr Purchases A/c ₹15,000. No Suspense entry.
- Goods returned omitted ₹4,000: Dr Returns Inward A/c ₹4,000; Cr Debtor A/c ₹4,000. No Suspense entry.
2. Prepare the Suspense Account and calculate the net effect of the errors on net profit.
Read the worked answer
Suspense Account:
| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Balance b/d | 5,500 | By Sales | 6,000 |
| To Rent | 1,500 | By Discount Allowed | 2,000 |
| To Returns Inward | 1,000 | ||
| Total | 8,000 | Total | 8,000 |
The account closes, so the corrected trial balance will agree.
Effect on profit:
- Sales overcast ₹6,000: profit overstated by ₹6,000.
- Discount allowed not posted ₹2,000: expenses understated, profit overstated by ₹2,000.
- Rent posted twice ₹1,500: expenses overstated, profit understated by ₹1,500.
- Sales Returns overcast ₹1,000: returns overstated, profit understated by ₹1,000.
- Furniture through Purchases ₹15,000: purchases overstated, profit understated by ₹15,000.
- Goods returned omitted ₹4,000: returns understated, profit overstated by ₹4,000.
Net effect = +6,000 + 2,000 − 1,500 − 1,000 − 15,000 + 4,000 = −₹5,500. The recorded profit is understated by ₹5,500.