Rectification of errors

This is a temporary account which is used to correct errors affecting the trial balance.

Example

The trial balance of 31st December 2009 showed a difference of Tsh 770 being a shortage on the debit side. A suspense account has to be opened and that difference is placed on the debit of suspense account. During the financial year, the following errors were discovered:

1. A cheque of Tsh 1,900 paid to Mr George had been correctly entered in the cash book but had not been entered in George's account.
2. The purchases account had been overcast by Tsh 200.
3. A cheque of Tsh 930 received from Johnson had been correctly entered in the cash book but had not been entered in Johnson's account.

Required

1. Prepare journal entry to correct the error.
2. Prepare a suspense account

Journal entry

S/N	Details	DR	CR
i	Mr. George's A/C	1,900
	Suspense A/C		1,900
ii	Suspense A/C	200
	Purchases A/C		200
iii	Suspense A/C	930
	Johnson's A/C		930

Suspense A/C

Date	Details	Amount	Date	Details	Amount
	Balance b/d	770		Mr George	1,900
	Purchases	200		Johnson	930
		1,900			1,900

In some cases, net profit reported is not correct, so it is corrected through this statement:

Statement of correcting net profit

Reported Net profit
	XXXX
Add: Under casted incomes	XXX
Over casted expenses	XXX
	XXX
Less: Over casted expenses	XXX
Under casted expenses	XXX
	XXXX
Actual net profit	XXXX

Suspense accounts and error correction are popular topics for examiners because they test understanding of bookkeeping principles so well. 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).

If the errors are not found before the financial statements are prepared the suspense account balance will be included in the statement of financial position. The balance should be included shown after the figure for net current assets, either as a negative amount (credit balance) or a positive amount (debit balance).

i. Suberrors: These may be a result that either can overcast or undercast the subsidiary books.

Examples: Show journal entries to correct the following errors

1. Sales journal has been undercast by Tshs 400,000
2. Purchase journal had been overcast by Tshs 60,000
3. Return inward journal has been undercast Tshs 75,000
4. Return outwards journal has been overcast by Tshs 25,000

Solution

Details	DR	CR
Suspense Account

Purchases account

Dr		Cr
Suspense A/C	60,000
(Being purchases overcast now rectified)

Return inward account

Dr		Cr
Suspense A/C	75,000
(Being return in undercast now rectified)

Return outward account

Dr		Cr
		Suspense A/C	25,000
		(Being return out overcast now rectified)

Suspense account

Dr		Cr
Sales A/C	400,000	Purchases A/C	60,000
Return Outward A/C	25,000	Return Inward A/C	75,000
		Total	135,000
Total	425,000

ii. Posting a figure on the wrong side of an account

Example: Show journal entries and ledger accounts to correct the following error.

A payment to Kelvin (a creditor) Tshs 1,500,000 has been credited to his personal account.

Journal entries

Details	DR	CR
Kelvin Account

Suspense account

Being posting a figure on the wrong side of account and now corrected | 1,500,000 | 1,500,000 |

Ledger Account

Suspense account

Dr	Amount	Cr	Amount
Balance b/d	1,500,000	Kelvin	1,500,000
Total	1,500,000	Total	1,500,000

Kelvin

Dr	Amount	Cr	Amount
Suspense	1,500,000	Balance b/d	1,500,000
Total	1,500,000	Total	1,500,000

iii. Posting a wrong figure from the subsidiary book to the ledger

Example: Show journal entries and ledger accounts to correct the following error.

Tshs 5,000,000 paid for salaries has been posted to the salaries account as Tshs 15,000,000

Details	DR	CR
Suspense Account

Rent account

Being wrong figure posted in salaries account now corrected | 10,000,000 | 10,000,000 |

Ledger Account

Suspense account

Dr	Amount	Cr	Amount
Salaries	10,000,000	Balance b/d	10,000,000
Total	10,000,000	Total	10,000,000

Salaries account

Dr	Amount	Cr	Amount
Balance b/d	15,000,000	Suspense	10,000,000
		Balance c/d	5,000,000
Total	15,000,000	Total	15,000,000

iv. Failure to post an entry from a subsidiary book to a ledger

Example: Show journal entries and ledger accounts to correct the following error.

Credit purchases amounting to Tshs 350,000 from Herieth have not yet been posted to her account.

Journal entries

Details	DR	CR
Suspense Account

Suspense account

Dr	Amount	Cr	Amount
Herieth	350,000	Balance b/d	350,000
Total	350,000	Total	350,000

Herieth account

Dr	Amount	Cr	Amount
Balance b/d	350,000	Suspense	350,000
Total	350,000	Total	350,000

v. Error in balancing an account

Example: Show journal entries and ledger accounts to correct the following error.

A cashbook shows a debit balance of Tshs 150,000 instead of 250,000

Journal entries

Details	DR	CR
Cash Account

Suspense account

Being error in the balancing the cash book is now corrected | 100,000 | 100,000 |

Ledger Account

Suspense account

Dr	Amount	Cr	Amount
Balance b/d	100,000	Cash	100,000
Total	100,000	Total	100,000

Cash account

Details	Amount	Details	Amount
Balance b/d	150,000	Suspense	100,000
		Balance c/d	250,000
Total	150,000	Total	350,000

Example 1

A bookkeeper prepared a Trial Balance on 31/03/2003 which showed a difference of Shs.140 (excess credit). The difference was placed to the suspense account. The following errors were subsequently located:

• A sale of goods to Bizimungu for Shs.600 had been posted to the wrong side of his account.
• Credit purchase of goods for Shs. 1,640 from Ramson had been posted to the personal account as Shs. 640.
• A cash sale of old furniture for Shs. 1,500 had been passed through the sales account.
• The discount received account had been undercast by Shs.60.
• Payment of rent Shs. 3,400 was debited to the personal account of the landlord.

Pass journal entries to rectify the errors and prepare the suspense account.

Solution

Journal entries

S/N	Particulars	DR	CR
	Bizungu A/C
Suspense A/C	1,200	1,200
	Suspense A/C
Ramson A/C	1,000	1,000
	Sale's A/C
Disposal A/C	1,500	1,500
	Suspense A/C
Discount received A/C	60	60
	Cash A/C
Landlord personal A/C	3,400	3,400

Suspense A/C

Date	Details	Amount	Date	Details	Amount
	Balance b/d	140		Bizungu	1,200
	Ramson	1,000
	Discount received	60
		1,200			1,200

Example 2

When extracting the trial balance of M. Magwanda & Co Ltd. as of 31st December. 2000, it was observed that the total debits exceeded the total credits by sh. 476,000.00. Investigations revealed the following errors:

1. Sales had been overcast by Shs. 30,000.00.
2. Returns outward account had not been credited with an amount of Shs. 122,640.00.
3. A payment by a debtor of Shs. 300,000.00 by a direct bank transfer had not been entered into the debtors' account.
4. Cash purchases of Shs. 4,640.00 had been recorded in the cash book only.
5. Shs. 44,000.00 received from a debtor had been debited to his account.

Required:

1. Show the necessary journal entries to correct the errors.
2. Show the suspense account after taking into account the errors in (a) above.

Solution

Journal entry

Details	DR	CR
Sales A/C
Suspense A/C	30,000	30,000
Suspense A/C
Returns outward A/C	122,640	122,640
Suspense
Debtors	300,000	300,000
Purchases
Suspense	4,640	4,640
Suspense
Debtors	88,000	88,000

Suspense A/C

Particulars	Amount	Particulars	Amount
Returns outward	122,640	Difference b/d	476,000
Debtors	300,000	Sales	30,000
Debtors	88,000	Purchases	4,640
Total	510,640	Total	510,640

Statement of correcting net loss

Net loss reported		500,000
Add sales over casted		30,000
Purchases under casted		4,640
		34,640
		534,640
Less Returns outward		122,640
Net loss corrected		412,000

Example 3

The following is a trial balance extracted from the books of Edward Msoke on 31st December 2001 which did not balance and the difference was put into a suspense account.

Account	Shs. Dr	Shs. Cr
Purchases	12,900
Wages	951
General expenses	210
Fixtures	30,500
Debtors and creditors	6,680	10,910
Cash in hand	20
Cash at bank	1,510
Edward Msoke, capital A/C		21,675
Edward Msoke, drawings A/C	700
Suspense A/C (Difference in books)	2,964
	56,435	56,435

On investigation, the following errors were discovered:

1. Purchases account in the ledger is undercast by Shs. 1,000.
2. Wages expenses balance of Shs. 915 is extracted in the Trial Balance as Shs. 951.
3. Sales to Irene Namaganda of Shs. 1,500 is correctly recorded in the Sales Journal but posted to her account in the Sales Ledger as Shs. 2,500.
4. Purchases of Shs. 2,000 from T. Okello is recorded in the Purchases Journal but is not posted to his account in the Purchases Ledger.
5. The opening balance of Shs. 25,000 in the Fixture Account is brought forward as Shs. 20,000.

In books of Edward – journal entries

Details	Debit (Shs.)	Credit (Shs.)
Purchases A/C	1,000
Suspense A/C		1,000
Being purchases account undercast by 1,000/= now corrected
Suspense A/C	36
Wages A/C		36
Being wages account overcast by 36/= now corrected
Suspense A/C	1,000
Irene Namaganda A/C		1,000
Being sales of 2,500/= entered in the personal account now corrected
Suspense A/C	2,000
T. Okello A/C		2,000
Being purchases of 2,000/= not posted to personal account now corrected
Fixtures A/C	5,000
Suspense A/C		5,000
Being fixtures account undercasted by 5,000/= now corrected

Suspense account

Dr		Cr
Difference in Trial balance	2,964	Purchases	1,000
Wages	36	Fixtures	5,000
Irene Namaganda	1,000
T. Okello	2,000
Total	6,000	Total	6,000

Corrected trial balance

Details	Debit (Shs.)	Credit (Shs.)
Purchases	13,900
Wages	915
General Expenses	210
Fixtures	35,500
Debtors and creditors	5,680	10,910
Cash in hand	20
Cash at bank	1,510
Edward Msoke, drawings A/C	700
Sales		23,850
Edward Msoke, capital A/C		21,675
Totals	58,435	58,435