Name East Glendalough School Correction of Errors

Accounting & Suspense

Correction Of Errors and the Suspense Account

1. At the start of the year, all the bal b/d on the left total to the same as all the bal b/d on the right.
2. During the year, Double Entry means each figure we put on the left of an a/c has an equal figure put
on the right of another a/c.
The result is that the Trial Balance at the end of the year will Balance.

Hence we can make two broad types of mistake when doing our book-keeping during the year.

1. Errors where the effect of the error causes the Trial Balance to not balance, and
2. Errors where the effect of the error causes the Trial Balance to still balance.

Where the Trial Balance does not balance we need to open a General Fix-It account to sort it all out. This
account will show the difference between the sides of the Trial Balance. When everything is sorted this account
will cease to exist as the difference will be zero. This account is called a Suspense account.

It is illegal to try and fix errors by deleting entries or crossing them out. We may only fix errors by writing in
new entries to produce a corrected result.

The effect of these entries can only be;

1. If we put new entries in Balance Sheet accounts, (Asset or Liability accounts),
The Asset/Liability will be made larger or smaller.
2. If we put new entries in a Trading/P & L accounts (Income or Expense accounts)
The Profit will be made larger or smaller.

Basic Transaction used for examples below.

Bank Buying a Van.
100 Pay out of Bank,
Van Receive a van.
100 NB: Buying an Asset, not paying an Expense.

Errors which will affect the Trial Balance.

Sums errors
Bank Bank Added or subtracted incorrectly to get wrong
100 c/d 10 100 closing figures
Van Van
100 100

Double Entry Errors

Bank Bank Put in one half of the double entry, forgot the
100 100 other
Van Van
100

Misplaced Entries
Bank Bank An entry on the wrong side, therefore both
100 100 entries are on one side, and nothing is on the
Van Machinery other side.
100 100

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B. Reid
Name East Glendalough School Correction of Errors
Accounting & Suspense

Errors which will NOT affect the Trial Balance.

Error of Omission
Bank Bank The entry has been forgotten totally, nothing
100 has been recorded. Zero on left & right, Trial
Van Van Balance will balance.
100

Errors of Reversal
Bank Bank Entries put in back to front; left is right & right
100 100 is left. Double entry still ok, Trial Balance will
Van Van balance.
100 100

Errors of Commission
Bank Bank Entry has gone into the wrong account, note it
100 100 is the right type of account, here one asset
Van Machinery account mixed up with another. Double entry
100 100 still ok, Trial Balance will balance.

Errors of Principal
Bank Bank Initially similar to the above error, (but very
100 100 different). The entry has not only gone into the
Van Purchases wrong account, but into the wrong type of
100 100 account. In this case an expense account.
Double entry still ok, Trial Balance will
balance.

Errors of Original Entry

Bank Bank The wrong figure was entered in the original
100 200 day books which mean the wrong figure was
Van Van entered in the accounts. The Double entry is
100 200 still ok, the Trail Balance will balance.

Errors of Compensation
Bank Bank A coincidence of the figures involved in the
100 100 errors will mean that the double entry will still
Van Van be ok and the Trial Balance will balance.
100 300
Rent
200

We need to be aware that

Sales (Income) Entries in Income a/cs go on the right, (e.g. Sales)
100 Extra Sales Extra Profit. Any entry Right side = + Profit

Van (Asset) Entries in Asset a/cs go on the left, (e.g. Van)

100 Left side = + Asset. Right side = + Liability

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B. Reid
Name East Glendalough School Correction of Errors
Accounting & Suspense

Private Debt Offset against a Business Debt.

Example
91 ii
A private debt of 220 owed by Quinlan to R. Murphy had been offset in full against a bill for 250 owed by
Murphy for car repairs previously carried out. No entry had been made in the books in respect of this offset.

Draw a diagram which shows

Busines The owner
Person
The other person
The business.

Owner

Include arrows showing who owes money to whom.

(Not who pays who)
Business In this case owner owes person, and person owes the business.
Debtor
Nb; Arrows only ever flow one direction.
Use this information to establish whether the person is a Debtor or
Creditor.
Owner Person owes to the business = Debtor
Business owes to the person = Creditor

Include a third arrow to complete the flow of the circle.

This shows the direction that money is effectively moving.
Debtor Business Either into the business as new capital.
Or, out of the business as drawings. (In this case drawings.)

The amount of the drawing is the amount of the owners private

Owner debt. Which you double entry to debtors, but this is not the full
debtors amount so you must now include the extra bit here also
and double entry to discount.

Drawings Drawings 220

220 Discount 30
Debtor Debtor 250
220
30 Being a private debt offset against a business debt
Discount not recorded.
30

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B. Reid
Name East Glendalough School Correction of Errors
Accounting & Suspense

Returns & Charges

06 ii
OMeara had returned a motor car, previously purchased on credit from a supplier for 14,600, and
had entered this transaction in as 16,400 on the correct sides of the correct accounts in the ledger.
A credit note subsequently arrived from the supplier showing a restocking charge of 500 to cover the
cost of the return
The only entry made in respect of this credit note was a credit of 14,100 in the creditors account.

The difficulty with this correction is not that it is hard, but rather that people fail to correctly read the sequence
of four short specific instructions. It is a simple purchase return/creditor, and as such the P rule should
illustrate where to start. The instruction of what they actually recorded is likewise straightforward. The only
new bit is the restocking/transport charge which is simply a double entry on the opposite side to what has been
recorded. This is because the restocking charge brings down the amount of the return.

Pur Ret Pur Ret

500 14,600 16,400
Creditor Creditor
14,600 500 16,400 14,100

Pur Ret Pur Ret Pur Ret 16,400

500 14,600 16,400 16,400 Creditor 14,100 16,400
Creditor Creditor Suspense 14,100
14,600 500 16,400 14,100
14,100 16,400 Pur Ret 500 14,600
Suspense Creditor 14,600 500
16,400 16,400
14,100

Sale of Equipment

02 v
1,400 received from the sale of an old display cabinet (book value 1,200) which was used by Townsend to
store private materials, had not been entered in the books.

This is a simple unrecorded selling of a Fixture & Fitting. The issues here are
A deliberate attempt to mislead the student by reference to what it was used for.
The fact it made a profit

Bank Bank 1,400

1,400 Fixtures & Fittings 1,200
Profit 200
Fixtures & Fittings
1,200

Profit & Loss

200

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B. Reid
Name East Glendalough School Correction of Errors
Accounting & Suspense

Buying Stock

06 i
A motor car, purchased on credit from D. Foran for 13,000, had been entered on the incorrect side of Forans
account as 1,300 and credited as 3,100 in the Equipment account.

Issue here is that D. Foran is someone we purchase cars from on credit. Therefore Foran is simply a Creditor.

Purchases Purchases Equipment 3,100

13,000 Suspense 1,300
Creditor 1,300
Creditor Creditor Suspense 3,100
13,000 1,300 1,300
Purchases 13,000
Equipment Creditor 13,000
3,100 3,100

Suspense
1,300 3,100

Car Part Returns

04 iii
Bedside Lockers, previously sold on credit for 340, had been returned to Craddock. These goods had been
incorrectly entered as 34 on the credit of the Fixtures & fittings account and as 40 on the debit of the
Purchases account.

In essence the same type of error as above. A straightforward credit transaction, (sales returns/debtor), entered
in a mixture of
wrong account / wrong side / wrong figure

Sales Returns Purchases Fixtures & Fittings 34

340 40 40 Suspense 40
Purchases 40
Debtor Fixtures & Fittings Suspense 34
340 34 34
Sales Returns 340
Suspense Debtor 340
40 34

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B. Reid
Name East Glendalough School Correction of Errors
Accounting & Suspense

Cheque Received by the owner

06 iii
A debtor who owed OMeara 1,000 sent a cheque for 800 and 150 in cash in full settlement. This was
correctly recorded in the books. However, no entry had been made in the books of the subsequent dishonouring
of this cheque or of the writing off of the remaining debt in full because of bankruptcy.

This one is difficult in that entries have been recorded correctly in the past and new information has come to
light which make it necessary to cancel out some of these entries but not others. The students job here is to
show these cancellation entries. The difficulty is that for most students it is extremely difficult to record
cancellation entries correctly.

The trick therefore is to show somewhere the original entries and it then becomes much easier to show the
cancellation entries on the opposite sides of the accounts.

However keep in mind that no errors have been made, we are not correcting anything, rather putting in new
entries which have not yet been recorded.

Original recorded entries

The cheque we got is no good, so it never really went into the bank.
The discount we gave is also no good as we never really got paid.

We must wipe out both these entries to a Bad Debts account.

However the cash is good and so remains in our accounts.

An issue which causes confusion is why do we not touch the Debtors account?

We dont touch the Debtors Account because;

The Debtors bill disappearing because they have paid us, becomes
The Debtors bill disappearing because they have gone bust.
Either ways it disappears and we have already recorded that fact.

Bank
800 800 Dad Debt 850
Debtior Bank 800
800 Discount 50
150
50
Cash
150

Discount
50 50

Bad Debt
800
50

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B. Reid
Name East Glendalough School Correction of Errors
Accounting & Suspense

New Capital into the business - Cheques & Holidays

06 v
A cheque for 2,250 paid by OMeara out of private bank account for 15 months hire of diagnostic equipment
up to 31/3/2002 had not been entered in the books.

Nothing has been recorded yet here, so there were no mistakes made. The two issues here are
1. New capital is being introduced, most of which is being used to pay an Expense, (rather than to buy an
asset or pay a creditor). This will directly affect Profit.
2. The fact some of that expense is for next year, creating a prepaid expense Asset.

Capital Hire/Rent 1,800

2,250 Hire prepaid- Asset 450
Capital 2,250
Hire/Rent
2,250 p& l 1,800
c/d A 450

00i
Reddington had won a private holiday prize for two, worth 5,000 in total. One ticket had been given to a
salesperson as part payment of sales commission for the year and the other to an advertising firm as payment in
full of a debt of 2,650. No entry had been made in the books

Again nothing has been recorded yet here, so there were no mistakes made. New Capital is being used to pay
wages & pay a Creditor. Paying the Creditor also involves a discount.

Capital Wages/Commission 2,500

5,000 Creditor 2,650
Capital 5,000
Wages/Commission Discount 150
2,500

Creditor
2,500
150
Discount
150

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B. Reid