chapter 15 Flashcards
what questions to be asked when no two situations are ever quite the same
how has the transaction been recorded?
How should the transaction have been recorded and what is the difference between what has been done and what should have been done?
What adjustments are required to correct the error?
suspense account
an account opened to record a difference between the debit and credit totals of the trial balance
reasons why a suspense account is used
As somewhere to put items that are unusual enough for it to be initially uncertain what it is or how to treat it. When it has been correctly identified or a decision about its treatment has been made, it can be transferred to the correct place by journal. An example might be an invoice relating to the purchase of a non-current asset where there are several items being charged for and it is not certain which of the items should be regarded as capital expenditure and which as revenue expenditure.
As a temporary account to help deal with errors that have caused a difference between the debit and credit columns in the trial balance. Its creation will enable the business to continue operating while an investigation takes place as well as providing an account that can be used to correct these errors. As will be seen, the suspense account should have a zero balance (and disappear) once all corrections have been made.
when should a suspense account be opened
should be opened only when attempts to find the cause of a difference on a trial balance has been unsuccessful. if the cause of the difference has still not been found, and a statement of profit or loss and a statement of financial position are required urgently, a suspense account can be opened
the checks needed to be carried out before opening a balance account
Check the additions of the trial balance.
If the difference is divisible by 2, look for a balance of half the difference that could be on the wrong side of the trial balance
the difference is divisible by 9, look for a balance where digits have been reversed - an error or original entry,
Check the totals of sales ledger balances and purchases ledger balances against the control accounts, if these have been prepared.
Check the extraction of balances from the ledgers
errors involving the suspense account
single entries
same side entries
unequal entries
balancing off/arithmetical errors
single entries
where only half of the financial transaction has been posted,
same side entries
when both entries have been made on the same side of two separate accounts
unequal entries
the entries have been made on the correct sides of the accounts but the figures differ
balancing off/arithmetical errors
resulting in the balance on one or more accounts being over or under added
when to use a suspense account
if there is still a small balance on a suspense account after all reasonable attempts have been made to find the difference, a business may decide that the amount involved is not material. It will save further time and expense in searching for errors by writing the balance off to the statement of profit or loss. Of course, if that is done, there is the possibility that a small difference could be two very large errors that are nearly compensating for each other.
question that need to be asked to know whether errors require the suspense account or not
Did the debits equal the credits when the original entries were made? If the answer is ‘no’, then the suspense account is required.
How may accounts have a problem because of this error? If the answer is ‘1’ then the suspense account is required.
errors and profit
The suspense account can enable the business to continue operating while an investigation into where the errors are takes place. If a set of provisional financial statements has been prepared, then it is possible that the profit figure will need changing, as well as the current asset or current liability sections in the statement of financial position.
errors, current assets and current liabilities
In addition to having an effect on profit, the correction of these errors will change some of the values shown in the statement of financial position. It would be useful to see what effect correcting any errors will have on the current assets and current liabilities
