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

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.