correct errors by means of suspense accounts

3 Verification of Accounting Records

Learning Objectives

• Explain the purpose and preparation of a trial balance and its link to the final accounts.
• Identify and classify the seven error types required by the Cambridge IGCSE syllabus.
• Correct errors using journal entries, including the appropriate use of a suspense account.
• Distinguish between errors that affect the trial balance and those that do not.
• Prepare a simple bank reconciliation statement.
• Explain the role of control accounts and prepare a purchases‑ledger control account.
• Apply AO2 (analysis) and AO3 (evaluation) skills when investigating and correcting errors.

3.1 Trial Balance

What is a Trial Balance?

A trial balance is a statement that lists the closing balances of every ledger account at a specific date, with debit balances in one column and credit balances in another. Its two main purposes are:

1. To verify that total debits equal total credits – i.e. the accounting equation remains in balance.
2. To provide the starting point for preparing the final accounts (the Income Statement and the Statement of Financial Position).

Limitations of a Trial Balance

• It does not detect errors that do not affect the total of debits and credits (e.g., omission, commission, principle errors).
• It will not highlight compensating errors that offset each other.
• Transposition or slide errors that happen to keep the totals equal are also invisible.

Preparing a Trial Balance (example)

Seven Types of Errors (Cambridge syllabus)

• Transposition error – two digits are reversed (e.g., £540 recorded as £450).
• Slide error – a digit is omitted or added, shifting the position of the other digits (e.g., £540 recorded as £5,400).
• Omission – a whole transaction is left out of the books.
• Commission error – the correct amount is entered, but in the wrong account (e.g., a purchase recorded as a sales entry).
• Compensating error – two or more errors offset each other, so the trial balance still balances.
• Complete reversal – the correct amount is entered, but the debit and credit sides are swapped.
• Principle error – a transaction is recorded in breach of an accounting principle. Example: purchasing a computer for £1,200 and recording it as an expense rather than as a capital asset.

3.2 Correction of Errors

When to Use a Suspense Account

A suspense account is a temporary holding account used when the exact nature of an error is not yet known. It allows the trial balance to be brought back into balance while the investigation proceeds. The suspense account **must be cleared before the final accounts are prepared**.

General Procedure for Errors that Cause an Imbalance

1. Determine the imbalance. Subtract the smaller total from the larger total to find the amount and which side (debit or credit) is short.
2. Open the suspense account. Record the balancing figure in the appropriate column:
   • If debits are short → credit the suspense account.
   • If credits are short → debit the suspense account.
3. Investigate the source. Check source documents, journal entries and ledger postings to locate the error.
4. Make the correcting entry. Once the error is identified, post a journal entry directly to the affected accounts (or adjust the suspense account if the error is still unknown).
5. Clear the suspense account. Transfer the amount from the suspense account to the correct account(s) so that the suspense balance becomes zero.
6. Close the suspense account. A zero balance confirms that all identified errors have been dealt with.

Direct Correcting Entries (when the error is known and the trial balance already balances)

For errors that do **not** affect the trial balance (e.g., omission, commission, principle errors) you do not need a suspense account. Follow these steps:

1. Identify the accounts involved and the correct amount.
2. Prepare a journal entry that reverses the incorrect posting and records the correct one.
3. Post the entry to the ledger.
4. Re‑calculate the trial balance to confirm it still balances.

Example – commission error: A purchase of £400 was mistakenly recorded as sales.

Debit   Purchases                £400
Credit  Sales Revenue            £400
        (to move the amount from Sales to Purchases)

Step‑by‑Step Example Using a Suspense Account

During trial‑balance preparation the totals are:

• Debits = £45,200
• Credits = £44,800

The trial balance is £400 short on the credit side.

Step 1 – Record the suspense entry (credit side short)

Step 2 – Locate the error

Review of the purchases ledger shows that a purchase of £400 was omitted.

Step 3 – Correcting journal entry

Debit   Purchases                £400
Debit   Suspense Account         £400
        (to record the omitted purchase)

After posting, the suspense account balance is zero and the trial balance remains balanced.

Errors that Do NOT Affect the Trial Balance

• Omission of a transaction (both debit and credit missing)
• Commission error (correct amount, wrong account)
• Principle error (e.g., capital vs. revenue classification)
• Complete reversal where the amounts are equal (debit and credit swapped)

These are discovered by:

• Cross‑checking source documents with ledger postings.
• Comparing subsidiary books with their control accounts.
• Analysing profit‑and‑loss figures for unusual variances.

When identified, make a direct correcting journal entry (see the “Direct Correcting Entries” box above). No suspense account is required because the trial balance stays balanced.

AO2 & AO3 Tips for Investigating Errors

3.3 Bank Reconciliation

Purpose

The bank reconciliation statement (BRS) explains the difference between the cash balance shown in the company’s books and the balance shown on the bank statement. It ensures that all cash movements are recorded and highlights:

• Bank errors
• Unpresented cheques
• Uncredited deposits
• Direct debits / standing orders not yet recorded

Key Items in a BRS

Simple Bank Reconciliation Example

After adjusting for the items above, the two balances agree, confirming that the cash records are complete.

3.4 Control Accounts

Purpose of Control Accounts

Control accounts summarise the totals of a group of related subsidiary ledger accounts. They provide a quick check that the subsidiary ledgers agree with the general ledger and help detect errors such as omissions, commissions, reversals and principle errors.

Purchases‑Ledger Control Account (example)

The total of the individual supplier accounts in the purchases ledger must equal the closing balance of the Purchases‑Ledger Control Account (£2,846). Any discrepancy signals a possible error in the subsidiary ledgers.

Typical Transactions Recorded in a Control Account

• Purchases on credit
• Cash purchases
• Discounts received
• Returns to suppliers
• Irrecoverable debts (bad debts) written off
• Dishonoured supplier cheques
• Contra entries (e.g., payments to a supplier who also owes the company)
• Refunds received from suppliers

Practice Questions

1. A trial balance shows total debits of £78,500 and total credits of £78,200.
   • Identify the amount and the side on which the suspense account should be entered.
   • Outline the investigative steps you would take to locate the error.
2. The following error was made: £1,250 of sales was recorded as £1,520.
   • State the type of error.
   • Show the correcting journal entry using a suspense account.
3. After correcting all identified errors, the suspense account still shows a credit balance of £150.

   What does this indicate and what should be your next step?

4. Prepare a bank reconciliation for the following information (all figures in £):
   • Bank statement balance on 31 July: 9,800
   • Deposits not yet credited: 500
   • Cheques issued but not yet presented: 1,200
   • Bank error – a charge of 30 recorded twice

   State the cash‑book balance after reconciliation.

5. The Purchases‑Ledger Control Account shows a closing balance of £3,400 credit. The total of the individual supplier accounts equals £3,150 credit.
   • What does the difference indicate?
   • Suggest two possible errors that could cause this discrepancy.

Summary Checklist (AO1)

• Check whether the trial balance is out of balance and calculate the exact amount.
• Enter the balancing figure in a suspense account on the appropriate side.
• Classify the error (transposition, slide, omission, commission, compensating, reversal, principle).
• Investigate source documents, journal entries and subsidiary ledgers to locate the error.
• If the error is known, make a direct correcting journal entry; if not, adjust the suspense account.
• Clear the suspense account so that its balance is zero before preparing the final accounts.
• Prepare a bank reconciliation when required, adjusting for unpresented cheques, uncredited deposits, bank errors and direct debits.
• Use control accounts to verify that subsidiary ledgers agree with the general ledger.
• Apply AO2/AO3 skills: analyse the size and pattern of imbalances, evaluate internal controls and suggest improvements.