Clearing a Suspense Account and Correcting Profit
On 30 June, the trial balance of Okafor Repairs shows debit totals of $186,400 and credit totals of $185,900. The $500 difference was posted to a suspense account. You investigate and find: (1) a supplier payment of $450 was entered correctly in the cash book but omitted from the supplier's account; (2) a cheque for $50 received from a customer was entered in the cash book but not posted to the customer's account; (3) equipment costing $3,000 was debited to repairs expense; (4) a sales invoice for $1,200 was recorded in the sales day book as $2,100; (5) closing inventory of $7,400 was counted but not yet included in the accounts. The owner wants the draft profit of $21,300 corrected. He believes all errors affect profit equally and that the suspense account can simply be closed to capital.
1. Identify which of the five items explain the $500 suspense balance and give the journal entries needed to clear it. State the balance on the suspense account after correction.
Read the worked answer
The suspense account has a credit balance of $500 because debit totals exceed credit totals by $500. Only one-sided errors affect it.
Items (1) and (2) are one-sided: the cash book entry was made but the personal ledger posting was missed. Each leaves a credit missing from the trial balance:
| Entry | Dr | Cr |
|---|---|---|
| Supplier payment omitted from supplier account | Suspense 450 | Payables 450 |
| Customer cheque omitted from customer account | Suspense 50 | Receivables 50 |
Total debits to suspense: $500, clearing it to nil.
Items (3), (4) and (5) do not affect suspense. In (3), both debit and credit were made, but the debit went to the wrong account. In (4), both sales and receivables were overstated by $900, so the trial balance still balances. Item (5) is a year-end adjustment, not a ledger posting error, so it does not create a trial balance difference. The owner is wrong to think all five affect profit equally; only (3), (4) and (5) affect profit.
2. Calculate the corrected profit and explain the treatment of items (3), (4) and (5).
Read the worked answer
Start with draft profit $21,300.
| Adjustment | Effect on profit $ |
|---|---|
| (3) Remove equipment from repairs expense | +3,000 |
| (4) Reduce sales from 2,100 to 1,200 | (900) |
| (5) Include closing inventory | +7,400 |
| Corrected profit | 30,800 |
Reasoning: item (3) is a capital purchase wrongly expensed. Repairs expense is overstated by $3,000, so profit increases; equipment should be capitalised and depreciated in future periods. Item (4) overstates sales and receivables by $900 ($2,100 - $1,200), so profit falls by $900. Item (5) is closing inventory omitted from the accounts; including it reduces cost of sales and increases profit by $7,400. Items (1) and (2) correct receivables and payables only, so they have no profit effect. The corrected profit is therefore $30,800, not $21,300.
3. The owner proposes closing the suspense account to capital. Explain why this is unacceptable and what the corrected entries achieve.
Read the worked answer
Suspense is not a real asset, liability or capital account. It is a temporary holding account for a bookkeeping difference. Closing it to capital would simply bury the error: capital would be misstated, the supplier and customer balances would remain wrong, and the underlying cause would be hidden. The trial balance would appear to balance without the ledgers being correct.
The corrected entries achieve two things. First, they put the missing credits into the payables and receivables ledgers, so the control accounts and the personal ledger balances agree. Second, they clear suspense to nil, which confirms the original difference has been explained. If a difference remains after investigation, it must be investigated further, not written off to capital. Writing off to capital is not a legitimate correction because it charges the owner's equity with an unexplained bookkeeping loss and conceals weak controls. The owner should also note that clearing suspense does not correct profit; the separate profit adjustments for equipment, sales and inventory are needed.