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

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

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

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:

  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

Journal
DateDetailsDr
$
Cr
$
1 JanuarySales Account125
Disposal Account125
1 JanuaryDisposal Account125
Profit and Loss Account125
1 JanuarySuspense Account10
Purchases Account10
1 JanuaryDrawings Account140
Purchases Account140
1 JanuaryBank Charges Account22
Suspense Account22
1 JanuarySuspense90
K Ramba90
  • 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
DateDetailsAmount($)DateDetailsAmount($)
1 JanuaryPurchases101 JanuaryBalance b/d78
1 JanuaryK Ramba901 JanuaryBank Charges Account22


100


100

c) Profit calculation:

DetailsAmount($)
Profit on 1 January28,400
Overstated Sales(125)
Assumed Profit on disposal125
Overstated Purchases10
Overstated Purchases140
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.

By |2017-08-09T10:17:09+00:00August 9th, 2017|Notes, Ordinary Level Notes, Principles of Accounts Notes|Comments Off on Principles of Accounting: An example of how to correct errors in a suspense account

About the Author:

He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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