Kamal Traders: Suspense Account and Corrected Profit
Kamal Traders is a sole trader's hardware business. The bookkeeper prepared a draft statement of profit or loss for the year ended 31 March 2025 showing a net profit of LKR 412,600, and a trial balance whose two sides differed by LKR 1,240; the difference was carried to a suspense account with a credit balance. The owner's review found the following, none of which has yet been corrected:
- A display cabinet bought on 1 April 2024 for LKR 45,000 was debited to the purchases account. No depreciation has been charged; policy is 10% a year on cost.
- The sales day book was overcast by LKR 2,000.
- A discount received of LKR 1,240 from a supplier was credited to the discount allowed account.
- A cheque for LKR 1,240 received from a debtor was entered in the cash book but not posted to the debtor's account.
- Closing inventory of LKR 78,000 at cost includes damaged taps costing LKR 12,000, whose net realisable value is only LKR 5,000.
The draft profit already reflects every item above as originally recorded.
1. Which of the five items explains the LKR 1,240 suspense balance, and why do the other four not affect the trial balance?
Read the worked answer
Item 4 explains it. The cheque was debited in the cash book but the debtor's account was never credited. The debit side therefore exceeds the credit side by LKR 1,240, which is exactly why the suspense account carries a credit balance of LKR 1,240. The correction is to credit the debtor's account (and debit suspense); it has no effect on profit because both the cash book and the debtor's account are balance sheet accounts.
The other four do not disturb the trial balance:
- Item 1 is an error of principle. Both the debit to purchases and the credit to cash/book value are of equal amount, so the trial balance still agrees; only the classification is wrong.
- Item 2 is an error of casting within the sales day book, but the wrong total was posted consistently to sales and to debtors, so both sides are overstated equally.
- Item 3 is an error of commission: LKR 1,240 was credited to the wrong account, but a credit of LKR 1,240 still exists in the ledger, so totals agree.
- Item 5 is a valuation error made at the year end in the stock figure itself; it changes profit but does not create unequal totals.
Only one-sided entries - a posting made to one account and not its counterpart - create a difference on the trial balance.
2. Prepare a statement correcting the draft net profit, showing the effect of each item, and state the corrected figure.
Read the worked answer
| Item | Adjustment | LKR |
|---|---|---|
| Draft net profit | 412,600 | |
| 1. Cabinet wrongly in purchases – add back | +45,000 | |
| 1. Depreciation 10% × 45,000 | −4,500 | +40,500 |
| 2. Sales day book overcast – reduce sales | −2,000 | −2,000 |
| 3. Discount received wrongly credited to discount allowed – remove the wrong expense | +1,240 | |
| 3. Discount received income now recorded | +1,240 | +2,480 |
| 4. Unposted debtor receipt – no profit effect | 0 | 0 |
| 5. Stock written down: 12,000 − 5,000 | −7,000 | −7,000 |
| Corrected net profit | 446,580 |
Reasoning on the two items candidates most often get wrong. Item 3: crediting discount allowed instead of discount received both inflates an expense by LKR 1,240 and omits an income of LKR 1,240, so profit is understated by LKR 2,480, not LKR 1,240. Item 5: stock must be valued at the lower of cost and net realisable value. The damaged taps must be reduced from LKR 12,000 to LKR 5,000, cutting closing stock and therefore profit by LKR 7,000.
Balance sheet effects of the corrections: non-current assets rise by LKR 45,000, accumulated depreciation rises by LKR 4,500, inventory falls by LKR 7,000, debtors fall by LKR 1,240, and capital rises by the LKR 34, - increase in profit (446,580 − 412,600).
3. The owner asks why a correction that changes profit by thousands of rupees does not change the trial balance totals at all. Explain, using two of the items above.
Read the worked answer
The trial balance only tests whether total debits equal total credits. It does not test whether each entry was posted to the right account, in the right account type, or on the right side.
Take the display cabinet (item 1). The correct entry is debit non-current assets LKR 45,000, credit cash/payables LKR 45,000. What was actually done was debit purchases LKR 45,000, credit cash/payables LKR 45,000. A debit of LKR 45,000 exists in both cases, so the totals still agree; only the account that received the debit is wrong. Profit changes because purchases were overstated by LKR 45,000, but no total changes.
Take the overcast sales day book (item 2). Sales were credited LKR 2,000 too much and debtors debited LKR 2,000 too much - the same error on both sides. Debits still equal credits, yet sales and receivables are both overstated.
So an agreed trial balance gives evidence of arithmetic accuracy only. Errors of principle, errors of commission, errors of original entry, compensating errors and errors of omission can all survive it. This is why item 4, a genuinely one-sided error, is the only one that produced a suspense account.