Principles of Accounting: An example of how to correct errors in a suspense account

• We have already looked at the suspense account and why it is needed
• We will now look at an example

You have extracted a trial balance and drawn up accounts for the year ended 31 December 20X7. There was a shortage of $78 on the credit side of the trial balance, a suspense account being opened for that amount.
During 20X8 the following errors made in 20X7 were found:

1. $125 received from sales of old office equipment has been entered in the sales account
2. Purchases day book had been overcast by $10
3. A private purchase of $140 had been included in the business purchases
4. Bank charges $22 entered in the cash book have not been posted to the bank charges account
5. A sale of goods to K Ramba $230 was correctly entered in the sales book but entered in the personal account as $320

Required:

1.  Show the requisite journal entries to correct the errors
2. Write up the suspense account showing the correction of the errors
3. The net profit originally calculated for 20X7 was $28,400. Show your calculation of the correct figure

Solution

a) The Journal Entries

• You will notice the disposal account and profit and loss entries. These were not required but were meant to show that disposal occurred
• We are assuming depreciation on the disposable assets is zero the question was not clear on this point

b) The suspense account:

c) Profit calculation:

• Negative amounts that reduce profit are in brackets
• A profit of $125 is assumed on disposal
• Private purchases made using the business’s money are treated as Drawings which are not included in profit calculations but appear as a separate item in the Statement of Financial position

To access more topics go to the Principles of Accounts Notes.