Clearing a suspense account and deciding which errors affect profit
Hasitha Traders' trial balance at 31 March 2024 failed to agree: the debit column was Rs 18,900 short of the credit column, and the difference was entered in a suspense account. The draft net profit for the year was Rs 486,000. While checking the books the following were found: (i) a credit sale of Rs 11,400 to Perera was entered in the sales day book and posted to the sales account but never posted to Perera's account; (ii) a cheque for Rs 4,600 paid to the supplier Silva was entered in the cash book but not posted to Silva's account; (iii) goods returned by a customer, Rs 2,900, were credited to the customer's account but omitted from the returns inwards account; (iv) goods returned to a supplier, Rs 3,200, were completely omitted from the books; (v) rent of Rs 5,000 paid by cheque was posted to the rates account. The owner wants to know which of these he must 'fix through the suspense account', and what his real profit is before he files his income tax return.
1. Prepare the suspense account and the journal entries needed to clear it.
Read the worked answer
Each of (i), (ii) and (iii) is a one-sided error: only one of the two legs of the double entry was made, so the trial balance disagreed.
Suspense account
| Dr | Rs | Cr | Rs |
|---|---|---|---|
| Balance b/d (debit column short) | 18,900 | (i) Perera account | 11,400 |
| (ii) Silva account | 4,600 | ||
| (iii) Returns inwards | 2,900 | ||
| 18,900 | 18,900 |
Journals
| No. | Dr | Cr | Rs |
|---|---|---|---|
| (i) | Perera (receivables) | Suspense | 11,400 |
| (ii) | Silva (payables) | Suspense | 4,600 |
| (iii) | Returns inwards | Suspense | 2,900 |
Reasoning: in each case the missing leg is a debit (receivables, payables, returns inwards), so the correcting entry must credit suspense until the debit balance of Rs 18,900 is wiped out. Note the direction: a debit balance in suspense means debits in the ledger were short, so corrections that supply missing debits are the ones that clear it.
2. Explain why errors (iv) and (v) do not go through the suspense account, and show the correcting entries.
Read the worked answer
(iv) Complete omission of Rs 3,200 goods returned to a supplier. Neither leg was recorded, but both legs are equally absent, so total debits still equal total credits. The trial balance agreed and suspense is untouched. The correction is a normal journal:
Dr Payables (supplier) 3,200 / Cr Returns outwards 3,200
(v) Rent posted to the rates account. Both entries are debits within the nominal ledger, so the trial balance still balances - this is an error of commission inside one class of account, not a one-sided error. Correction:
Dr Rent 5,000 / Cr Rates 5,000
Neither error affects the suspense account. The general rule: only errors that leave one side of the double entry missing or duplicated (or an arithmetic slip in extracting the trial balance) produce a suspense balance. Errors of principle, complete omission, compensating errors and misposting between two accounts of the same type never do.
3. Compute the corrected net profit and explain the treatment of each item.
Read the worked answer
| Item | Effect on draft profit | Rs |
|---|---|---|
| Draft net profit | 486,000 | |
| (i) sale not posted to customer's account | none – sales already credited | – |
| (ii) payment not posted to supplier's account | none – both cash and purchases correct | – |
| (iii) returns inwards omitted | profit overstated | (2,900) |
| (iv) returns outwards omitted | profit understated | 3,200 |
| (v) rent posted to rates | none – total expenses unchanged | – |
| Corrected net profit | 486,300 |
Reasoning for each
- (i) affects only the statement of financial position: receivables are understated by Rs 11,400. Sales and profit are correct.
- (ii) affects only payables, which are overstated by Rs 4,600.
- (iii) the debit to returns inwards was never made, so a deduction from gross profit was lost - profit falls by Rs 2,900.
- (iv) purchases were overstated by Rs 3,200 with no matching returns outwards, so profit rises by Rs 3,200. Note this error would never have been found from the suspense account; it was found by other means, which is why a nil suspense balance is not proof that the books are correct.
- (v) rent and rates are both expenses; the total charge is unchanged, but the expense analysis and any rent-control figures are wrong.