This is the final part in our series about identifying and correcting errors.
Previously, in parts one and two, we discussed using the trial balance to help ensure the accuracy and integrity of a set of accounts, but acknowledged its limitations in doing so, because whilst it discloses some errors, there are others it does not.
We named the six errors that are not disclosed by the trial balance as their effect on it does not cause an imbalance, and we looked at examples of how to correct them.
Now we need to return to the trial balance and think about what happens when there is an imbalance, so that when we have an error to correct, we can work out what to do if the answer is ‘yes’ to the question: ‘Is the trial balance unbalanced by what has happened?’
When the columns of the trial balance do not match
When the columns of the trial balance do not match, a suspense account is created to make them do so. This is a temporary account into which all the imbalances from errors that are disclosed by the trial balance are entered. The balance can therefore be made up of a mixture of debit and credit postings and it may take a number of journals to clear it back to nil. The important point to note is, that when we identify that an incorrect transaction has caused an imbalance on the trial balance, then we immediately know that the suspense account will have temporarily rebalanced it and therefore the suspense account will be involved in correcting the error.
Let’s look at an example from part two, where we said a single sided entry would be disclosed by the trial balance as the debits and credits wouldn’t match. Let’s say £15 was correctly credited to the bank account for stationery but no other entry was made.
We know there is an imbalance and therefore the suspense account will have temporarily rebalanced the accounts.
We also know that the credit entry in the bank account was correct and that the suspense account should have a nil balance. Therefore we have to write a journal to correct the error and are aware that journals must balance and the debit entry should come first.
Now all we need to do is identify the missing debit transaction, which will be the stationery account and by default, as this error was disclosed by the trial balance, we know that the opposite journal entry must be the suspense account.
This is a relatively straightforward journal correction, similar to those we looked at in part two for the non-disclosed errors, and in effect we have made the same correction as we’ve removed the transaction from the wrong account and put it in the right one. The difference is that the wrong account, when correcting disclosed errors, will always be the suspense account. This will still be the case on the occasions we have to use a four line journal to remove incorrect entries and then post correct entries, for example, when double sided entries are made.
Let’s see what we would need to do if £15 had been posted to the credit side of both the bank can stationery accounts.
Again there is an imbalance. The bank entry is still correct but the stationery account entry is on the wrong side and this has doubled the amount needed in the suspense account to rebalance it temporarily.
As the stationery account has been credited in error we need to make the journal correction in two parts. First we must remove the incorrect entries.
Then we must record the correct entries:
As we said at the start of this series, one of the problems with errors is that they are not predictable and can be made anywhere in the accounts and at any time. What is predictable though is the effect a mistake has on the trial balance. Therefore, once you have identified whether it is a disclosed or nondisclosed error, you can use your accounting knowledge of double entry bookkeeping and the suspense account, to work out how to make a successful correction.
However, we need to be mindful of not making mistakes whilst correcting errors. Common mistakes include preparing journals that; do not balance, use the wrong account names, are for the incorrect amounts or have the debits and credits backwards.
Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.