4. Correct Accounting Errors and Suspense Account

Accounting errors occur when transactions are recorded incorrectly. Identifying and correcting errors ensures accurate financial statements. The trial balance is the main tool used to detect errors.

---

4.1 Errors That Can Be Detected by the Trial Balance

The trial balance ensures that total debits = total credits. Errors detectable include:

1. Transposition errors

   • Digits are reversed (e.g., 540 recorded as 450).

2. Addition/subtraction errors

   • Totals in ledger accounts or trial balance are miscalculated.

3. Partial omission

   • A debit or credit is completely omitted.

Note: Only errors that affect the equality of debits and credits are immediately detectable.

---

4.2 Errors Where the Effect Causes the Trial Balance Not to Balance

These are errors that make the trial balance unequal:

• Single-sided entry: Only debit or credit recorded

• Addition errors: Total of debit ≠ total of credit

• Transposition errors: Digit reversal affecting one side

Detection:

• The trial balance shows a difference, prompting investigation.

---

4.3 Errors Where the Effect Causes the Trial Balance to Still Balance

These errors do not affect the equality of debits and credits. They are harder to detect:

1. Error of omission

   • Transaction completely omitted from books.

2. Error of commission

   • Wrong account used (e.g., rent expense posted to utilities expense).

3. Error of principle

   • Wrong type of account used (e.g., treating capital expenditure as revenue).

4. Compensating errors

   • Two equal but opposite errors cancel each other.

Detection: Requires detailed review of accounts.

---

4.4 Procedures for Correcting Errors

The organization must follow standard operating procedures (SOPs):

1. Identify the error type

2. Determine the correct entry

3. Pass correcting journal entry:

4. Update ledger and trial balance

Documentation:

• Use error correction notes

• Ensure approval from accountant/manager

---

4.5 Errors That Can Be Corrected by Suspense Account

A suspense account is a temporary account used when the trial balance does not balance.

Errors corrected using suspense account include:

• One-sided entries (missing debit or credit)

• Transposition errors causing imbalance

• Unidentified discrepancies in trial balance

Process:

• Post the difference to a suspense account

• Investigate the cause

• Correct affected accounts

• Close suspense account when error is resolved

---

4.6 Suspense Account Preparation

Steps to Prepare Suspense Account

1. Determine trial balance difference

2. Open Suspense Account in ledger

3. Post the difference:

   • Dr Suspense if trial balance shows debit deficiency

   • Cr Suspense if trial balance shows credit deficiency

4. Correct the errors in the respective accounts

5. Transfer balance to correct accounts and close suspense account

Example:
Trial balance shows debit > credit by Ksh 2,000:

• Dr Suspense 2,000

• After identifying error: correct the specific account and Cr Suspense 2,000

---

Short Exam-Ready Summary

1. Errors detected by trial balance: transposition, addition, single-sided entries.

2. Errors causing imbalance: omissions, wrong amounts, one-sided entries.

3. Errors that do not affect balance: errors of omission, commission, principle, or compensating errors.

4. Correction procedures: identify, pass correcting journal entries, update ledger and trial balance.

5. Suspense account: used temporarily to balance trial balance until errors are resolved.

6. Preparation: post difference, correct errors, transfer balance, and close suspense account.