Accounting Errors & Suspense Accounts

Module 1:
Foundations of Accounting

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Identify different types of accounting errors.

➛ Distinguish between errors that affect the trial balance and those that don’t.

➛ Explain when and why a suspense account is created.

➛ Correct errors using journal entries.

➛ Understand how suspense accounts are closed.

➛ Error of Omission
➛ Error of Commission
➛ Error of Principle
➛ Error of Original Entry
➛ Compensating Errors
➛ Transposition Error
➛ Suspense Account

➛ Error of omission
➛ Error of commission
➛ Error of principle
➛ Compensating errors

These do not disturb the equality of debits and credits.

➛ Transposition error
➛ Error of original entry
➛ Placing amounts on the wrong side
➛ Only one side of a transaction recorded

These create imbalances, leading to a difference in the trial balance.

Used only when
➛ The trial balance totals do not agree,
➛ And the accountant cannot locate the immediate error.

Once errors are found and corrected, the suspense account must be closed.

State the type of error that occurred

➛ Recorded $250 instead of $520
➛ Posted wages to Rent Expense
➛ Forgot to record a cash sale
➛ Posted a purchase in the supplier’s wrong account
➛ Posted $100 on the credit side instead of debit

Write Affect or No Effect
➛ Error of omission
➛ Only debit entry made
➛ Compensating errors
➛ Error of principle
➛ Amount recorded on wrong side

Say whether a suspense account is needed or not needed

➛ Trial balance differs by $200
➛ Cash sale omitted
➛ Recorded $45 as $54
➛ Supplier account wrongly posted
➛ Debit side $7,800, credit side $7,600

Correct the following
➛ Cash received from customer $300 posted only to Cash account.
➛ Wages $500 posted to Furniture account.
➛ Purchase of goods $700 completely omitted.

A printing shop finds their trial balance is off by $400. Investigation shows the following issues

Cash received $200 was posted as debit instead of credit
Rent Expense $300 recorded as $30
A credit sale of $500 was never recorded

Questions

➛ Which errors affect the trial balance?

➛ Should a suspense account be opened? Why?

➛ Provide the correcting journal entries.

➛ After corrections, is the suspense account closed?

➛ What is a suspense account?

➛ True or False | All errors cause the trial balance not to balance.

➛ Which error involves recording the wrong amount?

➛ What must be done to a suspense account after errors are corrected?

➛ Name one error that doesn’t affect the trial balance.

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Answers ➧ Here

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Accrual vs Cash Accounting ➧ Here