The third article in our three-part series on Accounting adjustments in an ETB or journals.
Study Tips: Accounting adjustments in an ETB or journals
- Part 1 – Accounting adjustments
- Part 2 – Irrecoverable debts and doubtful debts
- Part 3 – Correcting common errors
This series looks at one of the most difficult areas of accounts preparation within the AAT Advanced Diploma in Accounting; making corrections and adjustments.
Hopefully, you are well prepared for this concluding instalment and consequently ‘chance’ will favour your efforts now. In part one and two we looked at adjustments so now we can turn our attention to correction of errors.
Let’s start by answering a few key questions about suspense accounts.
What is a suspense account?
It’s a temporary account which is opened to make an unbalanced trial balance (TB).
Why would a TB be out of balance?
Any transaction in the accounting system that does not have equal debits and credits will ultimately cause an imbalance in the TB.
Does the suspense account have a debit or credit balance?
It can have either, depending on which column of the TB needs to be increased to make the totals of the debit and credit columns equal.
Is the balance made up of multiple transactions?
Yes it can be, and the effect of individual transactions can both increase and decrease the balance. In other words, there can be both debit and credit postings in the suspense account that comprise the overall balance.
Which financial statement does it go on?
It shouldn’t go on either as it should have a nil balance once it has been cleared.
Do all errors have to be corrected via the suspense account?
No. Only errors that originally unbalanced the TB will have been balanced by the suspense account so only those will need to be cleared via the suspense.
How do you clear it?
The best way is to clear it one transaction at a time, using a consistent and logical thought process to break the overall task down into manageable chunks.
That process is based on a few key thoughts applied to each individual transaction:
- What has actually happened?
- Are the total debits and credits equal?
- Yes – the transaction and therefore TB will balance.
- No – the transaction and TB will not balance. The Suspense account will therefore make the transaction balance.
- What should have happened?
- What correction(s) are needed?
Once we’ve worked through this thought process, we can apply the overall steps for making year-end adjustments.
In part one, we said you need to have a substantial depth of theoretical knowledge as well as practical expertise to correctly write journals and make adjustments. So, now we’ve answered questions about the underlying theory, let’s see how it can be applied in practice.
Writing journals and making adjustments
Let’s say office expenses of £540 have been posted to the Office Equipment account but the other side of the entry was correct.
We’re going to use ‘T’ accounts to help us see what actually happened rather than just visualising it in our heads.
Step 1 – What happened?
Step 2 – It is now easy to see whether the total debits and credits are equal. In this case they are, so there’s nothing for the suspense account do to.
Step 3 – What should have happened?
Step 4 – By comparing what was actually posted with what should have been posted we can see the correction required. In this case we’ll need to remove the incorrect posting in Office Equipment and make the correct posting in Office Expenses. ‘The other side of the entry was correct’ so no correction to the payment is needed.
Let’s try another one. Suppose a £100 invoice for printing was paid for with cash but only the debit side of the posting was recorded.
To show our corrections as journals we can simply take the information from our ‘T’ account workings.
Always ensure the journals balance and that the total debits match the total credits.
If you know the opening suspense account balance, then once you’ve dealt with all the individual transactions, check that those posted to the suspense actually clear the balance to zero.
Making year-end adjustments and correcting errors are challenging areas of accounting. The key to success is being fully prepared for the range and depth of knowledge required to be competent in them.
Hopefully this series of articles has helped deepen your understanding and given you practical methods to apply when practicing at work, home or in College.
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Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.