When there is an imbalance between total debits and total credits in the initial trial balance, the failure of the trial balance to 'balance' should be reported and there should be established procedures within the business for investigating and correcting the errors. The first step is to open a special account in the ledger called a suspense account. The account should be opened by entering a balance in the account, such that if the suspense account is added to the trial balance, total debits and total credits will be equal.
A draft initial trial balance has been prepared, and total debits are $145,600 and total credits are $127,100.
The calculation of the account balances and the trial balance itself are checked, but no errors are found in the preparation of the trial balance. The error or errors are therefore somewhere in the ledger accounting entries.
A suspense account should therefore be opened. Total debits exceed total credits by $18,500 ($145,600-$127,100). The opening balance in the suspense account should therefore be a credit balance of $18,500, to make total debits and total credits equal.
| Date | Details | Suspense $ | Date | Details | $ |
|---|---|---|---|---|---|
| Opening balance | 18,500 |
You have prepared a draft initial trial balance, with total debits of $267,109 and total credits of $295,133. The calculation of the account balances and the trial balance itself are checked, but no errors were found in the preparation of the trial balance. The error or errors are therefore somewhere in the ledger accounting entries. As the first step in the process of identifying and correcting the errors, open up a suspense account.
For a suggested answer, see the 'Answers' section at the end of the book.
In a computerised accounting system, many of the errors or omission that may occur in a manual accounting system simply cannot occur in a computerised system. One of the more common uses of the suspense account in a computerised system is for it to be used as a temporary account to record one part of the accounting entries to record a transaction, pending clarification and amendment of the item in due course.
The balance on a suspense account is the amount by which total debit balances and total credit balances on the ledger accounts are different. It therefore represents the effect of one or more errors where debit entries and credit entries have not matched each other
The next step is to identify the reasons for the errors, and having identified the errors, put them right
The process of looking for the errors involves going back through all the records of accounting transactions posted to the ledger since the previous trial balance was prepared, looking for errors that have been made. This can be a very long and time-consuming process. This is why it is usually a good idea to prepare a trial balance regularly. If an imbalance occurs, there will not be so many transactions to check, since the error must have occurred since the previous trial balance was checked and verified.
Although the search is for mistakes where the debit entry and the credit entry for a transaction have not matched each other, the checking process could reveal other errors too, that have not resulted in a mismatch between debits and credits. If any such errors are found, these should be corrected too, although the correction will not affect the suspense account.
Most errors, when found, are corrected by recording a double entry adjustment in the ledger accounts.
When an error is a cause of an imbalance between total debits and total credits, the double entry adjustment to correct it will involve either a debit entry or a credit entry in the suspense account.
When an error is found that has not caused an imbalance between total debits and total credits, the double entry adjustment to correct it will not involve an entry in the suspense account.
1 Having found an error, think about what has gone wrong.
2 If there is an error or omission in any ledger accounts which has not caused an imbalance between total debits and total credits, think about what needs to be done to correct it. The correction will involve a debit entry in one account and a credit entry in the other.
3 If there is an error or omission in any ledger accounts that has caused an imbalance between total debits and total credits, think about what needs to be done to correct it.
4 Before making any corrections in ledger accounts, the details of the correction should be recorded first of all in the journal, and then posted from the journal to the ledger. The journal entries will provide a record of the corrections that have been made, for future reference if required.
A trial balance has been produced, but the total debits and total credits are unequal.
| Account | Debit $ | Credit $ |
|---|---|---|
| Equipment | ||
| Bank | ||
| Receivables | ||
| Payables | 3,100 | |
| Capital | 14,700 | |
| Sales | 56,270 | |
| Purchases | 29,200 | |
| Expenses | 14,500 | |
| Sales returns | 760 | |
| Total | 74,520 | 74,070 |
An investigation of the accounting records reveals the following errors:
Although the ACCA FA1 syllabus and exam presumes that a computerised accounting system is used, this example is helpful to explain and illustrate the methodical approach required to identify and resolve errors in the accounting records.
Total debits exceed total credits by $450 ($74,520-$74,070), so we open a suspense account and enter a credit balance of $450.
| Date | Details | Suspense $ | Date | Details | $ |
|---|---|---|---|---|---|
| 30/6 | Opening balance | 450 |
This error has caused an imbalance between total debits and total credits, because the cash account has been correctly credited with a payment of $2,400, but there has been no matching debit entry in the equipment account.
To correct:
Journal entry
| Dr Equipment | $2,400 |
| Cr Suspense | $2,400 |
Correction of error of single entry on cash purchase of equipment
Credit purchases should be credited to the payables account, not debited. This error has therefore caused an imbalance between total debits and total credits. To correct the error we need to credit the payables account with $800 to reverse the incorrect debit and then credit the account with another $800 to enter the transaction correctly.
To correct:
Journal entry
| Dr Suspense | $1,600 |
| Cr Payables account | $1,600 |
Correction of error, purchases debited to C(P)LCA, now credited
Sales returns should be credited to the receivables account, not debited. This error has therefore caused an imbalance between total debits and total credits. To correct the error we need to credit the receivables account with $760 to reverse the incorrect debit and then credit the account with another $760 to enter the transaction correctly.
To correct:
Journal entry
| Dr Suspense | $1,520 |
| Cr Receivables ledger account | $1,520 |
Correction of error, sales returns incorrectly credited to receivables, now credited
This error has caused an imbalance between total debits and total credits, because the sales account should have been credited with $1,250, not $1,520. The credit entry is therefore $270 too much. To correct this, we have to debit the sales account with $270.
To correct:
Journal entry
| Dr Sales | $270 |
| Cr Suspense | $270 |
Transposition error, sales incorrectly credited with $1,520, corrected to $1,250.
The correcting entries in the suspense account are as follows:
| Suspense | Date | Details | $ | Date | Details | $ |
|---|---|---|---|---|---|---|
| Payables | 1,600 | 30/6 | Opening balance | 450 | ||
| Receivables | 1,520 | Equipment | 2,400 | |||
| Sales | 270 | |||||
| 3,120 | 3,120 |
There is no remaining balance so the error has been corrected.
A revised trial balance can now be prepared. Remember that the corrections have adjusted the balances on other ledger accounts. Here, the equipment account, receivables account, payables account and sales account all have altered balances.
Check these amended balances in the trial balance below, to make sure that you agree with how they have been calculated.
Key Points:
| Account | Debit $ | Credit $ |
|---|---|---|
| Equipment (20,700 + 2,400) | 23,100 | |
| Bank | 540 | |
| Receivables (8,820-1,520) | 7,300 | |
| Payables (3,100 + 1,600) | 4,700 | |
| Capital | 14,700 | |
| Sales (56,270-270) | 56,000 | |
| Purchases | 29,200 | |
| Expenses | 14,500 | |
| Sales returns | 760 | |
| Total | 75,400 | 75,400 |