Suspense Accounts and Errors Correction

Introduction
A suspense account is a temporary resting place for an entry that will end up
somewhere else once its final destination is determined. There are two reasons why a
suspense account could be opened:
1. a bookkeeper is unsure where to post an item and enters it to a suspense account
pending instructions

2. there is a difference in a trial balance and a suspense account is opened with the
amount of the difference so that the trial balance agrees (pending the discovery
and correction of the errors causing the difference). This is the only time an entry
is made in the records without a corresponding entry elsewhere (See exhibit A).

When the trial balance does not agree, the amount of the difference is entered in a
suspense account.

Exhibit A
Trial Balance as on 31 December 2005
　 　 　 　 　 　 Dr. 　 Cr.
$ $
Total after all the accounts have been listed 100,000 99,960
Suspense account 　 40
100,000 100,000

Types of Errors

There are two types of errors:

(i) Errors not affecting Trial Balance Agreement (i.e. total debit = total credit)
(ii) Errors affecting Trial Balance Agreement (i.e total debit > total credit or
total debit < total credit)
Treatment: The difference is temporarily entered into “suspense account” .

Exhibit B: Types of errors

Identify the following errors whether they affect the trial balance agreement or not.
Error type Suspense account involved?
1 Error of Omission – a transaction is not recorded at all No
2 Error of commission – an item is entered to the correct side of the wrong account
(there is a debit and a credit here, so the records balance)
No
Example: P. Luen paid us by cheque $100, correctly entered in the cash book, but it
entered wrongly into the account of P. Lee.

3 Error of principle – an item is posted to the correct side of the wrong type
(nature) of account

Example: when cash paid for plant repairs (expense) is debited to plant account
No
(asset).
(errors of principle are really a special case of errors of commission, and once again
there is a debit and a credit)

4 Error of original entry – an incorrect figure is entered in the records and then
posted to the correct account
No
Example: Cash HK$1,000 for plant repairs is entered as HK$100; plant repairs
account is debited with HK$100

5 Complete Reversal of entries – the amount is correct, the accounts used are
correct, but the account that should have been debited is credited and vice versa

Example: We paid cheque of $200 on 20 May 2005 to D.Chan.

Debit: Bank
No
Credit: D. Chan
6 Compensating errors – two equal and opposite errors leave the trial balance
balancing. (this case is rare)
No
Example: Purchases and Sales were overstated by $100.
7 Addition errors – figures are incorrectly added in a ledger account
Yes
e.g. overcast or undercast
8 Posting error –
a) debit but no credit; credit but no debit
b) enter a different amount on the debit side from the amount on the credit side.
Yes
Example: cash HK$10,000 entered in the cash book for the purchase of a car is:
a) posted to Motor cars account as HK$1,000 only, no posted to cash book

9 Trial balance errors – a balance is omitted, posting an amount incorrectly, or

Yes
posting a balance to wrong side of the trial balance

Correcting errors (I) – Suspense account not involved

Errors 1 to 6, when discovered, will be corrected by means of a journal entries between

the accounts affected.

Types of
　 　 　 　 　 　 　 $ $
errors
1 Purchases 　 　 　 　 　 250 　
　 T. Hung 250
　 Purchase of $250 was omitted, now corrected. 　
　 　
2 P. Lee 100 　
　 P. Luen 100
　 Purchases entered in wrong personal account, now corrected 　
　 　
3 Plant repairs 5,500 　
　 Plant 5,500
　 Repairs of Plant were wrongly entered to Plant account, now corrected. 　
　 　
 4 Plant repairs 900 　
　 Cash 900
　 Payment of $1,000 incorrectly entered as $100, now corrected. 　
　 　

5 D. Chan 400 　
　 Bank 400
　 Payment of $200 to D. Chan incorrectly credited to his account, and 　
　 debited to bank. Error now corrected 　
　 　
6 Sales 100 　
　 Purchases 100
　 Sales and purchases accounts were overcast by $100, now corrected. 　
　 　 　 　 　　 　

* For public examinations, narrations are usually not required for this topic.

Classwork

1. Show the journal entries necessary to correct the following errors: (Narrations are not
required)
(i) A sale of goods $678 to H. Luen had been entered in H. Lui’s account.
(ii) The purchase of a machine on credit from L. Po for $4,390 had been
completely omitted from our books.
(iii) The purchase of a motor van $3,800 had been entered in error in the motor
expenses account.
(iv) A sale of $221 to C. Fat had been entered in the books, both debit and credit as
$212.
(v) Commission received $257 had been entered in error in the sales account.
Correcting Errors (II) – Suspense account involved

Errors 7 to 8 also require journal entries to correct them. One side of the journal entry
will be entered to the suspense account opened for the difference in the records.

Error 9, trial balance errors- are different. As the suspense account records the difference,
an entry to it is needed, because the error affects the difference. However, there is no
ledger entry for the other side of the correction. Only single entry is needed.

Types of Examples Correcting journal entries

errors
$
8 A credit sale of $150 to Mr. Chan has been Dr. Mr. Chan 150
omitted from his account. Cr. Suspense 150
8 A sale to C. Lee for $250 was correctly Dr. Suspense 270
entered in the sales book but entered in C. Cr. C. Lee 270
Lee’s account as $520.
8 A credit sale of $100 has been credited to H. Dr. H. Cheung 200
Cheung’s account Cr. Suspense 200
7 Sales day book was overcast by $200 Dr Sales 200
Cr Suspense 200
7 Sales account was undercast by $40 Dr Suspense 40
Cr Sales 40
9 The total of the sales account of $1,500 has Dr Suspense 1,500
been omitted from the trial balance
9 The total of the sales account of $1,500 has Dr. Suspense 300
been extracted as $1,200 in the trial balance.
9 The total of the sales account of $1,500 has Dr Suspense 3,000
been extracted to the debit column of the trial ($1,500 x 2)
balance
 For HKCEE examinations, it often requires you to do the following 3 things:
 Show the journal entries to correct the errors
 Draw up the suspense account
 Show the calculation of the of the corrected net profit
An illustrative example (involving errors 1 -9)

The book-keeper of YY Limited extracted a trial balance on 31 December 2006 which

failed to agree by $330, a shortage on the credit side of the trial balance. A suspense
account was opened for the difference.

In January 2007 the following errors made in 2006 were found:

(a) Sales day book had been undercast by $100.

(b) Sales of $250 to K. Hou had been debited in error to K. Hung’s account.
(c) Rent account had been undercast by $70.
(d) Discounts received account had been undercast $300.
(e) The sale of motor vehicle at book value had been credited in error to sales account
$360.

(i) Show the journal entries necessary to correct the errors. (narrations not required)
(ii) Draw up the suspense account after the errors described have been corrected.
(iii) If the net profit had previously been calculated at $7,900 for the year ended 31
December 2006, show the calculation of the corrected net profit.

Suggested Solutions:

(i) YY Limited
The Journal

Particulars Dr Cr
HK$ HK$
1. Suspense 100
P & L - Sales 100

2. K. Hou 250
K. Hung 250

3. P & L – Rent 70
Suspense 70
4. Suspense 300
P & L – Discount received 300

5. P & L – Sales 300

Motor vehicle 300

6. Suspense account 360

Discount received account 360

(ii)

　 　 Suspense Account 　 　
HK$ HK$
Sales 100 Bal b/f 330
Discounts received 300 Rent 70
400 400

(iii) Leave for your own practice.

Some hints on preparing suspense accounts

 Does a correction involve the suspense account? The type of error determines this.
Practice and study of Exhibit B should ensure that you see immediately which
errors affect the balancing of the records and hence the suspense account.
 Which side of the suspense account must an entry go? This is one of the most
awkward problems in preparing suspense accounts. The best way of solving it is to
ask yourself which side the entry needs to be on in the other account concerned.
The suspense account entry is then obviously to the opposite side.
 Look out for errors with two aspects. An entry has been made to the wrong
account, but also to the wrong side of the wrong account. Both errors must be
corrected. It is very easy to fall into the trap of correcting only one of the errors,
especially when working quickly under examination conditions.
Further Practice HKCEE Questions:

1997 HKCEE Past Paper Question 3

2000 HKCEE Past Paper Question 10
2002 HKCEE Past Paper Question 5