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Mr, Moffat,
I have another question regarding suspense accounts.
A company’s draft financial statements for 20X5 showed a profit of $630,000. However, the trial balance did not agree, & a suspense account appeared in the company’s draft statement of financial position. Subsequent checking revealed the following errors:
[1] The cost of an item of plant $ 48000 had been entered in the cash book & in the plant register as $ 4800. Depreciation @ the rate of 10% per year ( $ 480 ) had been charged.
[2] Bank charges of $ 440 appeared in the bank statement in December 20X5 but had not been entered in the company’s records.
[3] One of the directors of the company paid $ 800 due to a supplier in thecompany’s payables ledger by a personal cheque. The book keeper recorded a debit balance in the supplier’s ledger a/c but did not complete the double entry for the transaction.
[4] The payments side of the cashbook had been understated by $ 10,000.
My question is why we can’t use option 3 & 4 to calculate the the company’s profit after the errors have been corrected.
For (3):
When the goods were purchases, the entry was Dr Purchases Cr Payables, and since purchases appear in the Statement of profit or loss, this would have affected the profit.
However this will already have been done and so the profit does not need changing.Paying the amount owing only affects balances in the Statement of financial position (it should be payables and cash; in error the bookkeeper has only debited payables. However cash only appears in the SOFP – not in the SOPL)
For (4):
The cash balance is wrong, but cash only appears in the Statement of financial position. It does not appear in the Statement of profit or loss.
Hey john,
Could you please explain me the all entries especially last 2. Thanksone of the following journal entries is correct according to its narrative?
t.com
Debit Credit $ $
A Mr Smith personal account 100,000
spo
Directors’ remuneration 100,000
Bonus allocated to account of managing director (Mr Smith)
B Purchases 14,000 Wages 24,000 Repairs to buildings 38,000
log
l.b
Transferring cost of repairs to buildings carried out by company’s own employees, using materials from inventory.
ia
r
C Discounts allowed 2,800
Discounts received 2,800
te
Correction of error: discounts allowed total incorrectly debited to discounts received account
a
D Suspense account 20,000
Rent receivable 10,000 Rent payable 10,000
-m
y
Correction of error: rent received credited in error to rent payable
account. (2 maA is not correct.
The bonus is an expense so should DR remuneration account (it is like a wages account) and CR personal account (because the money is owing to him – a liability)B is not correct.
They should DR repairs (it is an expense) and CR the other two accounts. (The repairs expense is being show as a separate expense, rather than show them as part of materials and parts of wages)C I can’t read properly what the entry has been, so I cannot say if it is correct or not.
The correct entry is to Cr discounts received (because it should not have been debited there) and Dr Discounts allowed (because that is where it should have been debited).D Again, I can’t read properly what the entry in the question says.
However, the correct entry would be DR Rent payable (it should not have been entered there because it is rent received) and CR Rent receivable (because that is where it should have been entered as income).Since the entry given for D involved a suspense account – D is not correct because a suspense account is only relevant if the DR’s and CR’s are not equal (whether or not the entries are to the correct accounts).
Thanks john and could you give me any advice for this subject because I am confident in applying the errors on scenario. Although I have enough knowledge of correction of errors and suspense account.
You are welcome. The only advice I can give is to keep practicing questions – it is impossible to practice too many questions 🙂
Hello Mr John, regarding this question, is it we needed to record ( [2] Bank charges of $ 440 appeared in the bank statement in December 20X5 but had not been entered in the company’s records.)in the suspense account?
No. If they had not entered the bank charges then they need to do so and the entry is Cr Cash 440 and Dr Bank charges 440.
It does not affect the suspense account at all – leaving out a double entry completely does not stop the trial balance balancing and therefore does not affect the suspense account.
Have you watched my lectures on suspense accounts? The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
Thank you Mr John, i am studying accounting degree in Malaysia and i am clear about this question. I think the entries is related to bank reconciliation right?
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