ZIMSEC O Level Principles of Accounts Notes: 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:
- $125 received from sales of old office equipment has been entered in the sales account
- Purchases day book had been overcast by $10
- A private purchase of $140 had been included in the business purchases
- Bank charges $22 entered in the cash book have not been posted to the bank charges account
- A sale of goods to K Ramba $230 was correctly entered in the sales book but entered in the personal account as $320
Required:
- Show the requisite journal entries to correct the errors
- Write up the suspense account showing the correction of the errors
- The net profit originally calculated for 20X7 was $28,400. Show your calculation of the correct figure
Solution
a) The Journal Entries
Journal | |||
Date | Details | Dr $ | Cr $ |
1 January | Sales Account | 125 | |
Disposal Account | 125 | ||
1 January | Disposal Account | 125 | |
Profit and Loss Account | 125 | ||
1 January | Suspense Account | 10 | |
Purchases Account | 10 | ||
1 January | Drawings Account | 140 | |
Purchases Account | 140 | ||
1 January | Bank Charges Account | 22 | |
Suspense Account | 22 | ||
1 January | Suspense | 90 | |
K Ramba | 90 |
- 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:
General Ledger | ||||||
Suspense Account | ||||||
Date | Details | Amount($) | Date | Details | Amount($) | |
1 January | Purchases | 10 | 1 January | Balance b/d | 78 | |
1 January | K Ramba | 90 | 1 January | Bank Charges Account | 22 | |
|
|
c) Profit calculation:
Details | Amount($) |
Profit on 1 January | 28,400 |
Overstated Sales | (125) |
Assumed Profit on disposal | 125 |
Overstated Purchases | 10 |
Overstated Purchases | 140 |
Bank Charges | (22) |
Revised Profit | 28528 |
- 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.
Quick NetOne, Telecel, Africom, And Econet Airtime Recharge
If anything goes wrong, chat with us using the chat feature at the bottom right of this screen