The Suspense Account That Wouldn't Balance
A junior accountant at a trading firm prepared a trial balance that failed to agree by Tk 18,400 (debit side short). In a hurry, she posted the difference to a suspense account and issued draft financial statements showing a profit of Tk 210,000. During review, the following were found: (i) a credit sale of Tk 9,000 to a customer was posted to the sales day book but not to the customer's ledger account; (ii) a purchase return of Tk 4,200 was entered on the wrong side of the returns-outwards account; (iii) a cheque for Tk 12,000 paid to a supplier was correctly entered in the cash book but omitted from the supplier's account; (iv) the difference of Tk 18,400 itself has not yet been explained. The owner wants to know whether he can rely on the Tk 210,000 profit.
1. Classify each of the four items by whether it explains part of the Tk 18,400 suspense difference, and quantify.
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Work through each item's effect on trial balance agreement:
- (i) Sale posted to day book but not to customer's ledger: the double entry is incomplete - sales account debited but receivable not debited. This is a one-sided error and does affect the trial balance. It creates a debit shortfall of Tk 9,000.
- (ii) Purchase return on wrong side of returns-outwards: a wrong-side posting is a two-sided error within the same account - the account is still debited and credited, just reversed. It does not affect trial balance agreement, though it misstates the returns figure.
- (iii) Cheque to supplier in cash book but omitted from supplier's account: the supplier's account is under-credited by Tk 12,000, so credits exceed debits by Tk 12,000 - a one-sided error that does affect the trial balance.
- (iv) Unexplained Tk 18,400: the residual.
Reconciling: 9,000 + 12,000 = 21,000 of identified one-sided errors, but the suspense is only 18,400. The two do not reconcile - Tk 2,600 remains genuinely unexplained (or an error was misclassified).
2. Should the owner rely on the Tk 210,000 profit? Advise on the corrections needed and the revised profit.
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Do not rely on it. The draft profit is unreliable for two reasons: (a) the suspense account is not cleared, meaning unidentified errors remain, and (b) item (ii) misstates a real account even though it doesn't affect the trial balance.
Corrections and profit effect:
- (i) Dr Receivable 9,000 / Cr Suspense 9,000 - corrects the balance sheet, no profit effect (sale already in sales).
- (iii) Cr Supplier 12,000 / Dr Suspense 12,000 - corrects the balance sheet, no profit effect (purchase already recorded).
- (ii) Returns outwards is on the wrong side. If a Tk 4,200 return was credited instead of debited, returns are overstated by 2 × 4,200 = 8,400, so purchases-related expense is understated by Tk 8,400 - profit falls by Tk 8,400.
Revised profit ≈ 210,000 − 8,400 = Tk 201,600, still subject to resolving the unexplained Tk 2,600. The owner should treat the statements as draft until the suspense account is fully investigated and cleared to nil.