Location And Correction of Errors - SS1 Accounting Lesson Note
Location of errors refers to identifying where mistakes have occurred in a company's financial records. Errors could be made when recording transactions, posting them to the wrong accounts, or making mistakes in calculations.
Once an error has been located, it is important to correct it promptly to ensure the accuracy of financial reporting. Corrections involve adjusting the affected accounts to reflect accurate information. Corrections can be made by creating adjusting entries, which are journal entries made to correct errors in previously recorded transactions. Adjusting entries can be used to correct errors related to revenue, expenses, assets, and liabilities.
Question:
Given an opening balance of ₦50,000, generate 6 other transactions and prepare a suspense account. Interpret your results.
Sold goods worth ₦20,000 on credit
Purchased goods worth ₦12,000 on credit
Paid ₦8,000 to suppliers
Received ₦5,000 from debtors
Paid rent of ₦3,000
Withdraw ₦2,500 for personal use
Answer:
Suspense Account
|
Date |
Particulars |
Debit (₦) |
Credit (₦) |
|
Opening Balance |
50,000 |
||
|
Sales |
20,000 |
||
|
Purchases |
12,000 |
||
|
Payment to Suppliers |
8,000 |
||
|
Receipt from Debtors |
5,000 |
||
|
Rent |
3,000 |
||
|
Drawings |
2,500 |
||
|
Suspense Account |
9,500 |
||
|
Closing Balance |
50,000 |
The total debits and credits are not equal in the above transactions, indicating an error in the bookkeeping process. To balance the books, a suspense account is created and the difference of ₦9,500 is posted to it. This account acts as a temporary holding account until the error is located and corrected.
The error can be identified by checking each transaction and comparing the debits and credits. It is possible that a transaction was recorded incorrectly, or a transaction was omitted. Once the error is identified, the suspense account balance will be adjusted accordingly, and the correct accounts will be debited or credited
It is important to correct errors promptly because they can affect the accuracy of financial statements, which in turn can affect decision-making by stakeholders such as investors and lenders.