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CONTROL ACCOUNTS, ERRORS AND SUSPENSE ACCOUNTS: ERRORS
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FUNDAMENTALS: CONTROL ACCOUNTS, ERRORS AND SUSPENSE ACCOUNTS
QUESTION BANK
Chapter 6: Control accounts, errors and suspense accounts Questions: 2, 4, 10, 14, 18, 21 – 23, 26, 30, 33 – 35, 39, 40, 43, 45, 64, 74, 78
ERRORS There are several types of error: •
those where an entry has been entered incorrectly or not at all;
•
those which are wrong as they “break the accounting rules”; and
•
those which are merely due to careless adding up or the incorrect transcription of numbers.
Many errors are corrected by reconciliations or in the preparation of the trial balance. If the trial balance does not balance, it is easy to spot that there has been an error; the harder part is identifying the error itself in order to be able to correct it. Errors which do not cause an imbalance of the trial balance are often harder to spot. These require a normal journal entry to correct.
ERROR
Correction uses DOUBLE ENTRY via a journal entry
the ledger balances
Examples of errors where the ledger balances includes: •
Rent expense is posted to the phone expense account
•
No entries are made for the purchase of goods
•
A contra settlement has only been recorded in the purchase and sales ledgers
Errors which lead to a trial balance which does not balance are a result of an incorrect double entry. To remove the error, we must correct the unbalanced account by debiting or crediting the required balancing figure to a suspense account (a temporary account) in order to balance the ledger. We then clear this suspense account with correcting journals.
ERROR
Correction uses SUSPENSE ACCOUNT in the double entry
the ledger does not balance
Examples of errors where the ledger does not balance includes: •
An page is lost from the sales day book
•
An overdraft balance is shown in the trial balance as a debit
•
An invoice is entered as a credit note
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CONTROL ACCOUNTS, ERRORS AND SUSPENSE ACCOUNTS
ERROR IN PRINCIPLE
The double entry is incorrect, e.g. a debit and credit have been made the wrong way around (for example, debiting the cash account and crediting the trade payables account), or revenue item has been treated as a capital item. Balances à use a journal entry to correct A transaction is completely omitted; no debit or credit is made.
OMISSION ERROR
Balances à use a journal entry to correct A debit or credit is made, but the corresponding entry is omitted. Does not balance à use the suspense account to correct
COMMISSION ERROR
A mistake is made in the double entry, e.g. the debit or credit is correct but made to the wrong account (for example, debiting wages to the Stationery account instead of the wages account). Does not balance à use the suspense account to correct The transaction is not recorded properly, e.g. adding up / casting errors Does not balance à use the suspense account to correct
COMPENSATING ERROR
TRANSPOSITION ERROR
An error exactly cancels out an error elsewhere in the accounts. Balances à use a journal entry to correct Digits in the debit entry are recorded the wrong way around in the credit entry, or vice versa. Does not balance à use the suspense account to correct
To correct an error, we must think of the correction being made in three steps: 1) Identify what actually DID happen; 2) Work out what SHOULD have happened; then 3) Think about how we can CORRECT this mistake. Q: A:
ERRORS (LEDGER BALANCES) – EXAMPLE
Electricity expenses of £350 were incorrectly debited to the rent account. What are the correcting journals? Following our three stepped approach: We debited the wrong account:
DID DO:
DR Rent
£350
CR Cash
£350
(Continued overleaf)
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CONTROL ACCOUNTS, ERRORS AND SUSPENSE ACCOUNTS
But, we should have debited the electricity expense account £350 instead: SHOULD DO:
DR Electricity
£350
CR Cash
£350
So we need to remove the incorrect debit from rent of £350, and debit electricity £350 instead:
TO CORRECT:
DR Electricity
£350
CR Rent
£350
Q: A:
ERRORS (LEDGER DOES NOT BALANCE) – EXAMPLE
£100 Cash received is debited to cash, but is also debited (instead of credited) to the Receivables Control Account. What are the correcting journal entries? Following our three-step approach: We debited RCA instead of crediting RCA, so we must credit a suspense account by £200 to balance out this error: DID DO:
DR Cash
£100
DR RCA
£100
CR Suspense Account
£200
The correct entry would have been:
SHOULD DO:
DR Cash
£100
CR RCA
£100
So we need to remove the incorrect debit of £100 to RCA (by crediting £100). We then need to credit RCA £100 (so in total we credit RCA £200). We then clear the suspense account by debiting £200: TO CORRECT:
DR Suspense
£200
CR RCA
£200
QUESTION BANK
Chapter 6: Control accounts, errors and suspense accounts Questions: 1, 5, 6, 12, 13, 15, 17, 19, 20, 24, 25, 27, 38, 41, 44, 46, 48, 54 – 56, 58 – 61, 63, 67, 73, 75 – 77, 79, 82 – 86
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