The Undercast Week: Four Errors Across the Books of Prime Entry
Ridgeway Supplies is a wholesale stationer that maintains a sales day book, a purchases day book, a returns inwards day book, a returns outwards day book, a three-column cash book and a general journal. At 31 March 2025 the trial balance was extracted and, because the two sides differed, a suspense account was opened with a debit balance of $910. The bookkeeper then found four items. (i) The sales day book total for one week was correctly cast at $8,420, but only $8,080 was posted to the sales account. (ii) A credit note for $215 issued to a customer for damaged goods was recorded in the sales day book as an invoice. (iii) A contra settlement of $1,250 between a customer's account and a supplier's account was entered only in the receivables ledger. (iv) An invoice for $980 for a new office photocopier was recorded in the purchases day book. No other errors have been found and no correcting entries have yet been made.
1. Prepare the journal entries needed to correct items (i) to (iv), with narrations, and state for each item whether the suspense account is affected and on which side.
Read the worked answer
(i) Sales total underposted - the day book was right; only the sales account was short by $340, so debits exceeded credits by $340 and the trial balance carried a $340 credit in suspense.
Dr Suspense 340 / Cr Sales 340 - to correct underposting of the week's sales total to the sales account.
(ii) Credit note entered as an invoice - the original entry was Dr Receivables 215 / Cr Sales 215 instead of Dr Returns inwards 215 / Cr Receivables 215. Reverse the wrong credit and the wrong debit, then record the return:
Dr Sales 215 Dr Returns inwards 215 Cr Receivables 430
No suspense entry: both the wrong and the right version are complete double entries, so the trial balance still agreed. It is an error of principle in the prime entry, not a one-sided error.
(iii) Contra only half entered - the credit to receivables was posted but the debit to payables was not, so credits exceeded debits by $1,250 and suspense carried a debit of $1,250.
Dr Payables 1,250 / Cr Suspense 1,250 - to record the missing debit side of the contra.
(iv) Capital expenditure in the purchases day book -
Dr Office equipment 980 / Cr Purchases 980 - to remove the photocopier from purchases and capitalise it.
Both original entries were debits, so the trial balance still agreed; no suspense.
Check on suspense: debit $1,250 less credit $340 = $910 debit, exactly the balance opened.
2. Calculate, item by item, the net effect of the four errors on the draft gross profit, and explain why the suspense balance agrees with only two of the errors.
Read the worked answer
| Item | Effect on sales / returns / purchases | Effect on gross profit |
|---|---|---|
| (i) sales underposted by $340 | sales +$340 | +$340 |
| (ii) credit note treated as invoice | sales −$215 and returns inwards +$215 | −$430 |
| (iii) contra half entered | none (balance sheet only) | nil |
| (iv) photocopier in purchases | purchases −$980 | +$980 |
| Net | +$890 |
Draft gross profit is therefore understated by $890; after correction it rises by $890.
Item (ii) needs care: the customer was never invoiced, yet the ledger shows a sale of $215 and no return, so both sales and returns inwards must move - the combined effect on gross profit is −$430, not −$215. Item (iv) removes $980 from purchases, but the photocopier must then be depreciated from the date it was available for use; that depreciation is an expense below the gross profit line and will partly offset the gain in net profit.
The suspense account can only pick up errors that break the equality of debits and credits. Items (i) and (iii) are one-sided, so they left the $910 debit balance. Items (ii) and (iv) are complete double entries - wrong accounts, wrong classification, wrong profit, but equal debits and credits - so the trial balance could not detect them, and they do not appear in suspense at all.
3. Write up the suspense account to show how it is cleared, and explain why a trial balance that balances is not proof that the ledger is correct.
Read the worked answer
Suspense account
| Debit | $ | Credit | $ |
|---|---|---|---|
| Balance b/d | 910 | (iii) Payables | 1,250 |
| (i) Sales | 340 | ||
| Total | 1,250 | Total | 1,250 |
The account closes to nil once both one-sided errors are corrected.
A balanced trial balance only proves that total debits equal total credits. It cannot detect errors that preserve that equality:
- Error of omission - a transaction never entered at all (e.g. no entry for cash drawings).
- Error of commission - posted to the right class of account but the wrong personal account (a customer's payment credited to another customer).
- Error of principle - revenue treated as capital, or the reverse, as in item (iv).
- Error of original entry - the wrong amount entered in the prime entry book and then posted consistently to both accounts, as in item (ii).
- Compensating errors - two independent errors of equal amount on opposite sides.
- Complete reversal of entries - debit and credit swapped on both sides.
- Transposition within one account - $540 written as $450 in a single account where the other side is correct would break agreement, but transposition applied to both sides equally would not.
So the corrected suspense account and the corrected trial balance are a starting point; proof of accuracy requires control accounts, bank and supplier statement reconciliations, a non-current asset register checked to physical assets, and analytical review of margins.