12: Errors and Suspense Accounts Flashcards
What are the five types of errors, and the two categories?
Five types:
- error of omission
- error of commission
- error of principle
- compensating error
- transposition error
Two categories:
- error where the trial balance still balances
- errors where a suspense account is created
What is an error of omission?
A transaction has been completely omitted from the accounting records
What is an error of commission?
A transaction that has been recorded in the wrong account but in the right financial statement (ie. motor expenses recorded as stationary)
What is an error of principle?
A transaction that has been conceptually recorded incorrectly (ie. an expense instead of an asset)
What is a compensating error?
Errors which are coincidentally equal and opposite to each other
What is a transposition error?
The correct double entry has been made but two digits in the amount are recorded the wrong way round
What is the correct approach to error questions?
What did they do?
What should they have done?
What correction is required to correct it?
What is a suspense account and how to correct it?
A temporary accounts - allows a transaction to be recorded in the accounting system, even though the ledger account for one side of the transaction has not yet been confirmed.
Automated or manual
ALWAYS REVERSE THE FULL AMOUNT OUT to correct - don’t care where it goes, get it out!
How may correction journals change profit and statements?
If the two accounts affected when correcting the statements live in the same statement, there is no effect on profit.
If they live in different statements, an impact on profit.
- Dr P&L, profit decreases
- Cr P&L, profit increases
Suspense account is defined as a SFP account, asset or liability depending on balance
What’s the best approach to fixing errors in ledger accounts
No system, but think about what needs to be added IN and what needs to be taken OUT of the final figure
Imagine the P&L in your head
Think: does this ‘reduce loss’ or ‘add income’?
