Correction of Errors and Suspense Accounts
Correction of Errors and Suspense Accounts
This domain tests the classification of errors, journal corrections, and the use of a suspense account when a trial balance fails to agree. Questions often require both the correcting entry and its effect on profit.
Core rules
- Errors of principle use the wrong class of account, e.g. revenue expenditure debited to equipment.
- Omission leaves out a transaction completely; commission uses the wrong account of the same class; original entry uses a wrong amount from the source document.
- Reversal swaps debit and credit; compensating errors cancel; a commission error can still balance.
- A suspense account is opened only for a difference in the trial balance and closed when corrections are made.
- Errors that do not affect trial balance agreement are corrected by journal without suspense.
Worked example
A payment of RM250 to a supplier was entered in the cash book but not posted to the supplier's account. The trial balance credit total exceeds debits by RM250, so a suspense account is opened with a debit balance of RM250. Correction: Dr Trade payable RM250; Cr Suspense RM250. The suspense account closes. By contrast, if a RM300 purchase invoice was completely omitted, the trial balance still agrees; the correction is Dr Purchases RM300; Cr Trade payable RM300, with no suspense.
Traps
- Using suspense for an error that did not cause an imbalance.
- Correcting only one side of a double entry.
- Treating an error of principle as a posting error.
- Forgetting that overstating sales overstates profit.
Key points
- Suspense only for trial balance difference
- Errors of principle misuse account type
- Omission keeps trial balance balanced
- Correction needs full double entry
- Consider profit effect