Learning Outcomes
After reading this article, you will be able to identify errors that affect the trial balance, explain when and how to use a suspense account, and apply correction of errors through journals. You will also learn how to re-extract a corrected trial balance after clearing errors, a key step for maintaining accurate accounts in the ACCA FA1 exam.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand how errors can arise in double-entry bookkeeping, the use of suspense accounts, and the steps to correct mistakes in the trial balance. Specifically, this article addresses:
- The extraction of a trial balance from ledger accounts
- Identification of errors that impact the agreement of a trial balance
- The purpose and operation of suspense accounts
- Preparation of correcting journal entries to clear errors
- Re-extracting the trial balance after all corrections have been made
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.
- If a trial balance does not agree, which account is used to temporarily hold the difference?
- Give one example of an error that would NOT affect trial balance agreement (i.e., would not be detected by extracting a trial balance).
- What double-entry is required to correct a payment for office stationery of $200 posted only to the credit side of the bank account?
- After correcting bookkeeping errors, what should you do before preparing the financial statements?
Introduction
Balancing the books is central to bookkeeping. However, errors can occur, resulting in a trial balance that does not agree. This article explains how to identify and correct such errors using a suspense account. You will also learn how to re-extract the trial balance after all corrections, ensuring that financial records are accurate and reliable.
Key Term: Suspense account
A temporary ledger account used to hold discrepancies when total debits and credits in a trial balance are unequal, pending identification and correction of errors.
Errors Affecting the Trial Balance
A trial balance lists all closing balances of ledger accounts and shows whether the system is arithmetically accurate. If total debits and credits do not match, there must be one or more errors.
Types of Errors
Some errors are revealed by the trial balance, while others are not. Errors that cause an imbalance are detectable; errors that do not disturb the balance may remain hidden.
Key Term: Error of omission
A transaction is completely left out from the books. Both debit and credit are missing, so the trial balance still balances.Key Term: Error of commission
A transaction is recorded in the correct category but the wrong account within that category (e.g., posted to the wrong customer).Key Term: Error of principle
A transaction is posted to an incorrect type of account (e.g., posting rent paid to equipment).Key Term: Compensating error
Two unrelated errors with equal and opposite effects, so the trial balance still balances.Key Term: Error of original entry
The wrong figure is used for both debit and credit (e.g., under or overrecorded amount).Key Term: Error of reversal
Debits and credits are posted the wrong way round (e.g., debit sales and credit bank instead of the opposite).Key Term: Transposition error
Digits are swapped in recording the amount, such as $54 entered as $45.
Errors Disclosed by the Trial Balance
- Single-sided entries (posting only one side of a transaction)
- Unequal amounts for debit and credit
- Adding an account balance incorrectly when extracting the trial balance
Errors Not Disclosed by the Trial Balance
- Complete omission of a transaction (both sides missing)
- Errors of commission, principle, compensating errors, original entry errors, or reversals where debits and credits remain equal
Exam Warning
Common pitfalls include assuming all errors will affect the trial balance. Remember, only errors that make debits and credits unequal will appear as a difference.
The Suspense Account
When the trial balance does not agree, the suspense account is opened with the difference. This allows for further investigation and correction while enabling the accounting process to continue.
How to Open a Suspense Account
If debits exceed credits in the initial trial balance, the suspense account opens with a credit balance for the difference. If credits exceed debits, open a debit balance.
Example:
If total debits are $15,000 and credits are $14,500, open the suspense account with a credit entry of $500.
Worked Example 1.1
A trial balance shows total debits of $22,000 and credits of $21,500. What entry should be made to open the suspense account?
Answer:
Open the suspense account with a credit balance of $500 ($22,000 - $21,500).
Correcting Errors Using Journals
Found errors are corrected by journal entries. Corrections that affect the trial balance require an entry to the suspense account; others require a transfer between accounts.
Steps for Correction
- Identify the nature of the error.
- Determine the correct double-entry that should have been made.
- Reverse the incorrect entry if necessary.
- Post the correction, using the suspense account if the original error caused the trial balance not to balance.
Key Term: Correcting journal entry
An entry made in the journal to amend an error found in the accounts.
Worked Example 1.2
A cash sale of $800 was credited to sales but not debited to bank. What correcting entry is required?
Answer:
Debit Bank $800
Credit Suspense account $800
This completes the missing side of the entry and clears part of the suspense balance.
Clearing the Suspense Account
As errors are located and corrected, each adjustment made to clear the suspense account brings the trial balance closer to agreement. Once all errors have been found and journals posted, the suspense account should have a zero balance.
Worked Example 1.3
A payment for repairs of $250 has been correctly credited to bank but was posted as a debit to equipment instead of repairs expense. What is the correction?
Answer:
Debit Repairs expense $250
Credit Equipment $250
This moves the debit from the wrong account to the correct one. Suspense account is not involved as the original debit and credit were equal.
Re-extracting the Trial Balance After Corrections
When all corrections are entered, total debits and credits should now agree. The trial balance is re-extracted by listing all ledger account balances, ensuring the suspense account is closed with a zero balance.
Worked Example 1.4
You have corrected all errors and closed the suspense account. What is your next step before preparing financial statements?
Answer:
Re-extract (prepare) the corrected trial balance. This ensures that accounts are arithmetically accurate before moving on to prepare the financial statements.
Summary
Suspense accounts are used when debits and credits do not match at the trial balance stage. Errors that cause the imbalance are found and corrected, with journals as needed. The suspense account is cleared, and a new trial balance is prepared to check that the books now balance.
Key Point Checklist
This article has covered the following key knowledge points:
- Identify errors that affect or do not affect the trial balance
- Explain when to use a suspense account
- Prepare correcting journal entries to resolve errors
- Re-extract the trial balance after corrections
- Recognise the importance of confirming the suspense account balance is nil before finalising accounts
Key Terms and Concepts
- Suspense account
- Error of omission
- Error of commission
- Error of principle
- Compensating error
- Error of original entry
- Error of reversal
- Transposition error
- Correcting journal entry