Suspense account and corrections - Journal corrections and n...

Learning Outcomes

After studying this article, you will be able to explain when a suspense account is used, identify different types of accounting errors, and apply journal entries and narratives to correct those errors. You will understand which errors affect the trial balance, how to use correcting journals, and the importance of clear explanations for each adjustment.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand both the identification and correction of accounting errors, including the use of suspense accounts and correcting journals. Specifically, you should be able to:

• List types of errors that affect agreement of the trial balance and those which do not
• Explain the purpose and operation of a suspense account
• Prepare journal entries to correct errors in the accounting records
• Attach appropriate narratives to journal entries for clarity
• Demonstrate how to clear a suspense account after corrections

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following errors will cause the trial balance to NOT agree?
   1. Transposition error
   2. Single-sided entry
   3. Compensating errors
   4. Error of omission
2. When a suspense account is needed, which of these is correct?
   1. It shows assets not recorded
   2. It is a temporary account for differences in trial balance
   3. All errors have been corrected
   4. It increases profit

3. Write a journal to correct this: Rent paid $320 was posted to Repairs expense.

4. What must every journal correction include to be acceptable for audit or review?

Introduction

Errors sometimes occur in the accounting records, especially when entering transactions manually or processing large batches of information. The trial balance acts as a check by ensuring that the total of debit balances equals the total of credit balances. If this agreement does not occur, a suspense account may be used temporarily until errors can be identified and corrected through journal entries. Understanding error types, suspense accounts, and effective journal narratives is essential for accurate accounting and ACCA success.

Key Term: suspense account
A temporary account used in the general ledger to hold the difference when the trial balance does not balance, pending correction of errors.

Key Term: journal correction
A double-entry adjustment made to correct previously recorded errors in the ledger accounts, usually documented in the journal.

TYPES OF ACCOUNTING ERRORS

Errors in the accounting system fall into two main categories—those that cause the trial balance to be unequal, and those that do not.

Errors that Cause an Unequal Trial Balance

• Single-sided entries (only a debit or only a credit recorded)
• Unequal amounts posted to debit and credit for the same transaction
• Incorrect addition or omission of an account balance when preparing the trial balance

Errors Not Detected by the Trial Balance

• Errors of omission (entire transaction missed)
• Errors of commission (right amount, wrong account of same type)
• Errors of principle (amount posted to wrong type of account)
• Reversal of entries (debit and credit posted the wrong way round, but with equal value)
• Compensating errors (two separate errors with equal but opposite effect)

Key Term: error of omission
Failing to record both the debit and credit sides of a transaction, so the trial balance still agrees.

Key Term: error of principle
Posting a transaction to the wrong type of account (e.g. recording a personal withdrawal as a company expense).

Worked Example 1.1

A business receives a $1,000 sales invoice for new equipment but records it as Purchases instead of Non-current Assets. What type of error is this, and will the trial balance agree?

Answer:
This is an error of principle. The total debits and credits are still equal (debit Purchases, credit Payables), so the trial balance will balance.

SUSPENSE ACCOUNTS AND ERROR CORRECTION

If the totals of the debit and credit columns in the trial balance are not equal, a suspense account for the difference allows accounts to be finalised while the error is investigated. Once the error is found, you must post a correcting journal to both correct the ledger and clear the suspense account.

Key Term: correcting journal
The accounting entry made to correct a discovered error in the ledger.

Opening a Suspense Account

If debits exceed credits by $500, open the suspense account on the credit side with $500. If credits exceed debits, use a debit entry.

Clearing the Suspense Account

After identifying and correcting the errors, the suspense account should have a zero balance. If not, further errors exist.

Worked Example 1.2

On extracting a trial balance, debits total $45,150; credits total $44,950. What journal entry is posted initially?

Answer:
Debit Suspense account $200
(to balance the trial balance until errors are found)

CORRECTING ERRORS WITH JOURNAL ENTRIES AND NARRATIVES

Correcting an error requires a journal entry that reverses the incorrect entry and posts the correct one. Every correcting journal should include a narrative—a concise explanation stating the reason for the adjustment.

Key Term: narrative
A clear description added to a journal entry explaining why the adjustment is being made.

Steps for Correction

1. Determine what was posted originally—identify the accounts and amounts involved.
2. Determine what should have been posted.
3. Post a correcting journal for the difference, with a narrative explaining the reason.

Worked Example 1.3

Repairs expense of $290 was accidentally entered as Rent expense. What is the correcting entry and appropriate narrative?

Answer:
Debit Repairs $290
Credit Rent $290
Narrative: "To correct repairs misposted to rent expense."

Exam Warning

Be precise with the accounts and amounts involved in both the incorrect and the corrective entries. Incorrect narratives or failure to identify both steps may result in lost marks.

Summary

Accounting errors can affect both the accuracy of accounts and the trial balance. Suspense accounts temporarily hold unmatched amounts. Once errors are identified, correcting journals with clear narratives are used to amend the ledger. The suspense account must be cleared to zero before preparing final statements.

Key Point Checklist

This article has covered the following key knowledge points:

• Identify errors that affect or do not affect the trial balance
• Explain the use and purpose of a suspense account
• Prepare correcting journal entries for common errors
• Write clear, appropriate narratives for journal corrections
• Demonstrate how to clear a suspense account after error correction

Key Terms and Concepts

• suspense account
• journal correction
• error of omission
• error of principle
• correcting journal
• narrative