Adjustments to Profit and Suspense Accounts

1 Introduction

These are two areas, often related, asking you to show the effect of correcting errors. They are a good way of testing your knowledge and understanding of bookkeeping, without requiring you to produce lots of t-accounts.

2 Adjustments to profit

YouTube video

In these questions, a set of draft (or rough) financial statements have been prepared. However, subsequently various errors and omissions have been discovered.

Our task is to calculate the correct profit. However, you are not required to produce a new Statement of Profit or Loss. Therefore we produce a statement which starts with the profit from the financial statements, adds or subtracts to adjust for the various errors listed, and ends with the correct profit.

Alison’s draft financial statements show a net profit for the year of $52,380. Subsequently, the following errors come to light:

No entry has been made for $563 cash received from Adele, a customer whose debt was written off last year as irrecoverable.
Closing inventory valued in the draft accounts at its cost of $8,920, was believed to have a potential sales value of $7,930
Goods which had cost $2,000 had been sent to a customer just before the year end on a sale or return basis. These had been accounted for as a firm sale, with a profit of 20% of cost. No confirmation of the sale had been received from the customer.
A payment for rent charged in full to the current year included $490 which relates to the next accounting period. No adjustment had been made for this when preparing the draft accounts.

Prepare a statement of adjustments to profit in order to calculate the correct net profit for the year.

Statement of adjustments to profit

Draft profit	52,380
Debt recovered	563
Closing inventories (8,920 – 7,930)	(990)
Sales or return	(400)
Prepayment	490
Adjusted profit	$52,043

3 Suspense Accounts

YouTube video

In an earlier chapter we looked at the Trial Balance. The trial balance should balance, and if it does not then there must be errors somewhere that need to be found.

However, it is likely that the difference on the trial balance is the net result of several errors. In practice, we would have to start checking the bookkeeping entries until we found an error. It would then be useful to have a note of how much errors still remained in order that we would know when we had finally found all the errors!

A common way of doing this (and a common exercise in the examination) is to open a t-account called the Suspense Account (or Difference Account) with a balance equal to the trial balance difference. This is in some ways an artificial account, in that had the double entries all been correct then there would be no trial balance difference.

However, it does provide a useful check when finding errors. Every time we find an error in the bookkeeping, we will correct it and at the same time make an entry in the Suspense Account to show that part of the difference had been found. When all the errors have been found, the balance on the Suspense Account will fall to zero.

IMPORTANT: When bookkeeping was done manually there were many mistakes that could be made when entering figures (as in the following example). With the use of computers most of these mistakes would not occur - the debit and credit will always be of the same amounts (although the amount entered could obviously be wrong). However questions such as this example can still be asked in the exam as a way of testing your understanding of double entry bookkeeping.

Biruta has prepared the following trial balance.

	Dr	Cr
Motor Van, at cost	5,500
Inventory	6,230
Receivables Ledger Control	19,167
Cash at bank	218
Petty Cash	50
Payables Ledger Control Account		13,166
Prepayments	490
Accruals		70
Motor Van – accumulated depreciation		2,000
Sales		93,870
Purchases	76,182
Rent expense	1,200
Wages expense	12,500
Electricity expense	516
Telephone expense	230
Accountancy expense	500
Van expenses	280
Depreciation expense	1,000
Capital		10,000
	124,063	119,106

The trial balance does not balance, and Biruta realises that this means that there must be errors in the bookkeeping.

On investigation, the following errors are discovered:

A transposition error was made when posting a sales day book total of $8,132. The correct figure was entered in the receivables ledger control account, but it was posted to the sales account as $1,832
The balance on the electricity account was incorrectly recorded and should read $615
One cash payment for electricity of $200 had been recorded throughout as $20
When accounting for the telephone accrual of $70 at the year end, a single entry had been made. It was the expense account entry that had been missed out.
A mistake had been made when casting the purchases account. The total should have been $77,356

Open a suspense account. For each error make any relevant entries in the suspense account.

Suspense Account
Sales	6,300	Balance	4,957
		Electricity	99
		Telephone	70
		Purchases	1,174

	6,300		6,300

Answer the questions one at a time. Your progress is saved so you can leave and come back.

Open chapter practice