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Hi John, there’s something about the corrections using suspense accounts that I’m just not getting. From your lectures and the textbook, I’ve simply memorised the “rule”, so I can potentially get the questions right in exams, but in my head it doesn’t make any logical sense.
For example, from question 18.5 in the BBP exam kit…
A discount of $50 given to a customer had been credited to discounts received.
In order to fix this we would credit 2*50 for a total credit of 100.I’ve basically memorised that for these types of errors I need to fix it by multiplying by 2. But I don’t understand why. I would have thought that you would debit discounts received by 50 to clear the error, then credit the suspense account by 50. Then to clear the suspense account later on, to debit the suspense account by 50 and credit discounts allowed. Why would we credit the suspense account by 100 instead? Would that then not effectively result in a debit of the suspense account by 100 and credit to discounts allowed of 100? And that would result in 50 understatement of profit?
Maybe I’ve missed something in the lessons, but it’s just not making sense logically to me. Thanks!
If a discount is given to a customer, then it should have been debited to discounts allowed.
So in the trial balance at the moment, the debits are too low by 50 (because the debit is not there) and the credit are too high by 50 (because they have listed 50 that should not be there).
If the debits are too high by 50, and the credits are too low by 50 as well, then it means the total of the debits is 100 more than the total of the credits.
So….to make it balance we would have a suspense account with a credit of 100. Then the debits equal the credits.
When we correct the error, we credit discounts allowed with 50 (to remove what should not be there). We credit discounts received with 50 (to put what should be there). We debit the suspense account with 100.
The balance on the suspense account is then zero.
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