Kedai Buku Suria: Suspense, Mispostings and an Owner in a Hurry
The trial balance of Kedai Buku Suria at 30 June 20X6 showed debit totals of RM186,420 and credit totals of RM185,670; the RM750 difference was posted to a suspense account. The draft profit for the year is RM32,400. While preparing the financial statements you discover the following:
(i) the sales day book was overcast by RM400; (ii) office equipment costing RM3,600 was debited to the purchases account; (iii) a cheque for RM620 paid to a supplier was entered in the cash book but not posted to the supplier's account; (iv) discount received of RM150 was credited to the discount allowed account; (v) a credit sale of RM1,750 to a customer was completely omitted from the books; (vi) stationery of RM130 was entered in the cash book but not posted to the stationery account.
The owner, Puan Lim, says the difference is 'small change' and wants the draft profit reported to the bank as it stands, arguing that the suspense account will sort itself out next year.
1. For each of items (i) to (vi), state whether it affects the suspense account and whether it affects profit, giving your reason.
Read the worked answer
| Item | Suspense? | Profit? | Reason |
|---|---|---|---|
| (i) Sales overcast RM400 | No | −RM400 | Both sales and receivables are overstated by the same amount, so the trial balance still balances. Sales must be reduced. |
| (ii) Equipment in purchases RM3,600 | No | +RM3,600 | A wrong account (error of principle), but both sides of the entry were posted. Purchases are overstated; a non-current asset is understated. |
| (iii) RM620 cheque not posted to supplier | Yes - RM620 | None | Only one side of the double entry exists (cash book credit). The supplier's account is short of a RM620 debit, so the debit column total is short. |
| (iv) Discount received credited to discount allowed | No | Nil | Both sides were posted, so the trial balance balances. Discount allowed is understated by RM150 (profit overstated) and discount received is understated by RM150 (profit understated) - the two cancel. |
| (v) Credit sale RM1,750 omitted | No | +RM1,750 | Nothing was recorded at all, so both columns are equally short. Sales and receivables are understated. |
| (vi) Stationery RM130 not posted | Yes - RM130 | −RM130 | Cash book entry only; the stationery account is short of a RM130 debit. When corrected, the expense reduces profit. |
2. Prepare the journal entries to clear the suspense account and calculate the corrected net profit.
Read the worked answer
Clearing the suspense account. The debit column exceeded the credit column by RM750, so suspense carries a credit balance of RM750. Both suspense items are missing debits, so debits must be posted to the accounts concerned:
| Dr | Cr | RM |
|---|---|---|
| Supplier's account | Suspense | 620 |
| Stationery | Suspense | 130 |
| Suspense | 750 |
Corrected profit.
| Item | RM |
|---|---|
| Draft net profit | 32,400 |
| (i) reduce sales | (400) |
| (ii) remove equipment from purchases (add to non-current assets) | 3,600 |
| (iv) discount received / discount allowed misposting | 0 |
| (v) record omitted credit sale | 1,750 |
| (vi) stationery now posted | (130) |
| Corrected net profit | 37,220 |
(iv) is deliberately shown as nil: the two RM150 errors are in opposite directions. Item (iii) affects only a personal account and has no profit effect. The corrected figure is RM4,820 higher than the draft - 15% of draft profit, which is far from 'small change'.
3. Respond to Puan Lim on the 'small change' argument and the view that the suspense account will sort itself out.
Read the worked answer
On 'small change': the RM750 balance looks immaterial - 0.4% of the trial balance - but materiality is judged on the effect on the financial statements taken as a whole, not on the size of the suspense balance. The errors move profit by RM4,820, which is 15% of draft profit. A user reading RM32,400 instead of RM37,220 could reach a different lending decision.
On 'sorting itself out': a suspense balance is never self-correcting. It is not an asset and not a liability; it exists only because the bookkeeping failed, and it must be analysed and cleared before the statements are prepared. If it is carried forward:
- it appears on the statement of financial position as a fictitious item, which misstates both assets and capital;
- the errors stay in the ledger permanently, so next year's opening balances - and next year's profit - are also wrong;
- the trail for finding the cause becomes colder each month.
Action: correct all six items now, clear suspense to nil, and show the corrected profit. If the corrections are made after the draft has been circulated, disclose the nature and effect of the corrections. Presenting a known misstatement to a bank is a matter of integrity, not of judgement about materiality.