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Theory
Suspense Accounts
| Question | Answer |
|---|---|
| Explain with an example what is meant by error of principle | An error of principle arises when an item is posted to the correct side of the incorrect class of account. For example an electrical wholesaler purchased a Motor Vehicle to be used for delivering goods bought online, but includes the van in the Purchases account rather than the Motor Vehicles account. |
| What is the purpose of preparing a trial balance | A trial balance is prepared in order to test/check the accuracy of double entry bookkeeping before preparing the income Statement, (Final Accounts) and the Statement of Financial Position. (Balance Sheet) A trial Balance should have the same total of debits and credits because under double entry bookkeeping every debit entry should have a corresponding credit entry |
| Outline the different types of errors that may affect the balancing of the trial balance | 1. Entering one figure on one side of a ledger account, but entering a different figure on the other side of another account |
| State and explain two types of errors not revealed by the trial balance | Errors not revealed by the trial balance include the following: Errors of original entry- errors in the books of first entry Errors of principal- errors in the wrong class of account-entering an asset in the expense account. Errors of complete omission- where both debit and credit are omitted. Errors of commission- posting to wrong account but correct side of correct type of account. Compensating entries – where entries of equal value cancel each other out. |
| Give an example of an error of commission. Will this type of error be revealed by a trial balance? Explain your answer | This is where the correct amount is posted to the correct side of the incorrect Account. For example sales of €5,000 debited to M O’ Flaherty’s account instead of D O’ Flaherty. This will not be revealed by the trial balance as the correct amount has been entered on the debit side even though in wrong account. The debit side and credit side of the trial balance will agree so it will not be obvious that an error has been made. |
| Outline the purpose of a suspense account | A suspense a/c is used when there is a mistake in the accounts that prevents the trial balance from balancing. The difference between the debit and the credit side of the trial balance is entered in the suspense a/c, until the errors are discovered, in order to allow the trial balance to balance. The relevant errors are corrected through the suspense account and the balance is then eliminated |
| Explain Compensating errors | Compensating errors: This is where an error on the debit side of one account is compensated by another error of an equal amount on the credit side of another account. For example, a cash payment of €550 for repairs entered as €55 on the debit of the repairs account and on the credit side of the cash account |
| Explain Errors of original entry | Errors of original entry: These are errors made in the books of first entry which are then, subsequently, posted to the appropriate ledger accounts. For example, credit purchases from T. Long €223 entered as €322 in the purchases book and posted accordingly to both the purchases account and to Long’s account |
| Identify three types of errors that affect the balancing of a trial Balance | Errors in figures and addition Posting only one side of the double entry Entering one amount on the debit side of one ledger account and entering a different amount on the credit side of another ledger account. |
| Explain with examples what is meant by Error of Commission and Error of Principle | An error of commission occurs when the correct amount is posted to the correct side of the incorrect account. Example: Goods sold on credit to Brian Brady debited in error to John Brady’s account. An error of principle arises when an item is posted to the incorrect class of account. Example: A boutique owner purchased a vehicle and treated it as a purchase of stock |
Created by:
21JulianM
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