Chapter 12 Errors and suspense accounts

Question 1

1.1 Errors

Answer 1

Errors can fall into two categories, errors where the trial balance still balances and errors where a suspense account is created, without which the trial balance would not balance.
Errors were the trial balance still balances:
- Error of omission: transaction omitted from accounting records
- Error of commission: transaction recorded in the wrong account but in the right financial statement
- Error of principle: transaction conceptually been recorded incorrectly (debiting as an expense rather than as asset)
- Compensating error: errors coincidentally equal and opposite to each other
- Transposition error: correct double entry made but two digits are recorded the wrong way round
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 must be cleared before the financial statements can be prepared.

Question 2

1.2 Adjustments to profit

Answer 2

The correction journal may result in a change in profit, depending on whether the journal debits or credits the statement of profit or loss.
Profit will decrease for a Dr Statement of profit or loss Cr Statement of financial position account. Profit will increase for Dr Statement of financial position account and Cr Statement of profit or loss.