4. Correcting Errors Flashcards
What is the accounting approach to correcting errors in the accounts?
One approach to the correction of errors is to:
1. Identify the original incorrect entry
2. Identify what the entry should have been
3. Create a correcting journal entry
What is a suspense account?
A suspense account is a temporary account used when the computerised accounting system or bookkeeper is unsure how to record one side of a transaction.
How is a suspense account used?
A suspense account is a temporary account which allows a transaction to be recorded in the accounting system, even though the ledger account for one side of the transaction is not yet confirmed.
The suspense account can be opened by the computerised accounting system (when it cannot match a transaction detailed on the bank transaction report) or by the bookkeeper (when they are unsure of which ledger account to use).
Once the issue has been resolved, i.e., the transaction has been matched or the correct account has been identified, the suspense account should be cleared using a journal entry.
Why might a suspense account contain several items?
As all unmatched and unidentified transactions in a reporting period are accounted for in a single suspense account, the balance on the suspense account may contain several different items.
All of the items should be investigated and correcting entries made. Several journal entries may be required to clear the suspense account.
How is the suspense account dealt with when it comes to preparing the statement of profit or loss and statement of financial position?
A suspense account should only be temporary. There should be no suspense account when it comes to preparing the statement of profit or loss and the statement of financial position.
The suspense account should be cleared and all correcting entries made before the final financial statements are drawn up.
How can the correction of errors affect the financial statements?
Correcting errors can affect either the statement of financial position or the statement of profit or loss, or sometimes both. An error of omission corrected by debiting sales and crediting trade receivables with £90 meant that sales decreased, so the gross profit was reduced £90 as a result of the error being corrected.
Why should an accountant be sceptical if they find a number of error corrections that affect gross and/or net profit?
An accountant should apply professional scepticism if they find a number of adjustments to the financial statements that impact on profit as it may indicate that the errors or omissions were intentional and that the financial statements have been subject to manipulation, perhaps to achieve a certain revenue or profit target.
What is the accounting treatment in a situation where errors are discovered after the final trial balance and draft statement of profit or loss and statement of financial position have been prepared?
If errors are discovered after the final trial balance and draft statement of profit or loss and statement of financial position have been prepared, then corrections will alter those draft financial statements.
The accountant may need to demonstrate how draft financial statements are affected by error corrections by calculating:
1. How much gross or net profit is increased or reduced as a result of error correction; and
2. The final gross or net profit after the error correction
