Lesson Notes By Weeks and Term - Senior Secondary School 1

SUBJECT: FINANCIAL ACCOUNTING

CLASS:  SS 1

DATE:

TERM: 2nd TERM

TOPIC: CORRECTION OF ERRORS 

CONTENT

• Suspense Accounts 

• Correction of Errors 

Errors made in the recording of the day-to-day transactions can be divided into those which are not revealed (disclosed) by the trial balance and those which result in the trial balance not balancing.

Where the trial balance total do not agree it is usual to apply the following quick check list to locate the errors. 

1. Check the additions of the trial balance.
2. Check the addition of the balance of each ledger account.
3. Check that each ledger account balance has been entered in the correct column of the trial balance. 
4. Check that every ledger account balance has been entered in the trial balance. 
5. Look for a transaction equal to the difference in the trial balance and check that a double entry has been made for that transaction. 
6. Look for a transaction equal to half the difference in the trial balance and check if it has been entered twice on the same side of the ledger rather than once on each side.
7. Check the double entry for every transactions entered in the books since the date of the last trial balance.

If after applying the above quick check list the errors are not found immediately, the trial balance is balanced temporarily by inserting the difference between the trial balance totals in a Suspense Account. 

The Suspense Account is a temporary account in which the difference on the trial balance is recorded until the errors are located (discovered) and corrected. 

Where the trial balance totals do not agree and to avoid any delay in the preparation of the final accounts, a Suspense Account would be opened to record the difference in the trial balance totals pending the time the error(s) are located and corrected. As the errors are found, they are corrected by means of a journal entry (i.e. entry in the General Journal). The appropriate entries are then made in the ledger accounts. When all the errors have been found and corrected, the suspense account will close automatically.

Uses of the Suspense Account 

1. A Suspense Account is used to record differences in the trial balance temporarily until the errors are detected and corrected. 
2. Suspense Account is also used when transactions are recorded in the books before any decision has been made about their proper accounting treatment 
3. The Suspense Account provides an account to which an entry (i.e. one aspect of a transaction) could be made until its correct destination (i.e. the account to which it should be posted) is known 

How to Open a Suspense Account 

A Suspense Account is opened in the general ledger with a balance on whichever side of the Suspense Account that will make the trial balance agree when the balance is inserted in it. For example, if the total of the credit side of a trial balance is N6, 000 less than the total of the debit side, the Suspense Account will be opened with a credit balance of N6, 000. When the Suspense Account balance is inserted in the trial balance, the trial balance will balance. 

NB: Once a Suspense Account is opened, the final accounts can be prepared even if all the errors have not been discovered. In this case the balance on the Suspense Account will appear in the Balance sheet (as an asset if it is a debit balance and as a liability if it is a credit balance). 

How to Correct Errors 

The correction of errors will require journal entries which will be posted to the ledger accounts. 

1. If the error being corrected does not affect the agreement of the trial balance, the journal and ledger entries will not involve the Suspense Account 
2. If the error being corrected affects the agreement of the trial balance, the journal and ledger entries will involve the Suspense Account

Step (Processes) Involved in Correction of Errors 

To decide how to correct an error, ask the following questions. 

1. How should the transaction have been recorded? 
2. How has the transaction been recorded? 
3. What type of error has been committed by the book-keeper who recorded the transaction?  i.e. will the error affect or not affect the agreement of the Trial Balance? As indicated above, this step is very crucial to indicate whether the Suspense Account will be involved in the correction of the error or not. 
4. What entries are required to be passed to correct the error? 

In applying the steps enumerated above, it is useful to remember the following. 

1. An item on the wrong side of an account must be corrected by an adjustment equal to twice the amount of the original error (once to cancel the error and once to place the item on the correct side of the account). 
2. Some errors do not affect the double entry: an example would be a debit balance on Rent Account N850 included in the trial balance as debit balance N650. To correct the error, a one-sided entry should be made in the journal and the Suspense Account. Such errors do not require to be corrected by debit and credit entries.

EVALUATION 

1. Briefly explain three uses of Suspense Account 
2. State seven errors that will be disclosed by the Trial Balance 

Illustration: 

Kehinde extracted a trial balance from her ledgers on 31st December 2017. The trial balance totals were N23, 884 (debit) and N24, 856 (credit). She placed the difference in a Suspense Account. Subsequent 

investigationinto the accounts revealed the following: 

1. The debit side of the Telephone Account had been overstated by N200
2. An invoice sent toAdejumo forN240 had been completely omitted from the books.
3. A cheque for N124 received from Diligent Enterprises had been posted to the debit of their account
4. The purchase of some office equipment for N1,180 had been debited to Office Expenses Account
5. Discounts received, N90, had been posted to the purchases ledger but not to the Discounts Received Account. 
6. Rent paid, N800 had been credited to Rent Receivable Account. 
7. A refund of an insurance premium, N60, had been recorded in the Cash Book but no other entry had been made. 
8. A purchase of office stationery,N220, had been debited to Purchases Account in error. 
9. A credit balance of N30 in the purchases ledger had been omitted from the list of balances extracted from the ledger. The total of the list had been included in the trial balance. 
10. Goods returned to Ready Stores had been credited to Ready Stores Account and debited to Purchases Returns Account. The goods had cost N400

Required:

1. Prepare journal entries to correct the errors indicated above
2. Prepare the Suspense Account showing the opening balance and the correcting entries

General Journal 

                                            Dr        Cr

                                            N        N

1. Suspense Account                             200   

        Telephone Account                                    200

    being correction of error on overcast of N200 of the Telephone Account 

1. Adejumo                                 240

        Sales Account                                        240

    being correction of error on invoice sent to Adejumo omitted from 

the books 

1. Suspense Account                             248

        Diligent Enterprises                                     248

    being correction of error on cheque of N124 received from Diligent 

    enterprise debited to their account 

1. Office Equipment Account                         1, 180

        Office Expenses Account                                1, 180

    being correction of error on office equipment purchased debited

    to office Expenses Account. 

1. Suspense Account                             90

        Discounts Received Account                                    90

    being correction of error on discount received not posted to the

    Discounts Received Account 

1. Rent Receivable Account                           800   

    Rent Payable Account                                  800

        Suspense Account                                    1, 600

    being correction of error on rent paid wrongly treated as rent received 

1. Suspense Account                                 60

        Insurance Account                                        60

    being correction of error on refund of insurance omitted from the 

    Insurance Account 

1. Office Stationery Account                           220   

        Purchases Account                                      220

    being correction of error on purchase of office stationery wrongly

    debited to Purchases Account 

1. Suspense Account                                 30

    being memorandum entry to correct a credit balance in the purchases 

    ledger omitted in the Trial Balance 

1. Ready Stores                                   800

        Purchases Returns Account                                  800

    being correction of error on goods returned to Ready Stores wrongly

    credited to their account 

Suspense Account 

                        N                    N

    Difference on Trial Balance        972    Rent                1, 600

    Telephone                200

    Diligent Received             248

    Discounts Received              90

    Insurance                  60

    Correction of trade creditors           30

                    1, 600                    1, 600

EVALUATION 

1. Simplified and Amplified Financial Accounting Exercise 2, 3, 4, 5X, 6 and 9
2. Essential Financial Accounting Exercise 12.2, 12.5A, 12.8A and 12.9A 

READING ASSIGNMENT 

1. Simplified and Amplified Financial AccountingPage 134 – 154 
2. Essential Financial Accounting Page 90 – 105 

GENERAL EVALUATION QUESTION 

1. WAEC JUNE SSCE Past Questions 

June 1992 Question 2 

June 1999 Question 6 

June 2010 Question 5 

June 2012 Question 6

June 2017 Question 5

WEEKEND ASSIGNMENT 

1. Which of the following errors will affect the totals of a trial balance   A. compensating errors   

1. complete reversal of entry   C. error of original entry    D. omission a ledger balance in the trial balance 

1. Pending the location of an error, the difference disclosed in a trial balance is temporarily treated in   A. Suspense Account   B. Trading Account    C. Control Account    D. Profit and Loss Account 
2. Which of the following accounts has a credit balance  A. Cash   B. Capital    C. Drawing    D. Premises 
3. Purchases Account is overcast by N200, while wages Account is undercast by N200. This is   A. an error of omission    B. a compensating error    C. an error of commission    D. an error of principle 
4. Which of the following is entered in the General Journal   A. purchases of goods    B. sale of goods on credit    C. returns inwards     D. acquisition of fixed assets 

THEORY 

1. What is a Suspense Account 
2. State three uses of a Suspense Account