Contents: 7 sections
Cambridge IGCSE Accounting 0452 · Core and Extended
Syllabus points
- Correct errors by means of journal entries.
- Explain the use of a suspense account.
- Prepare a statement of corrected profit.
- Explain the effect of correcting errors on the financial statements.
The question that decides everything
Before writing a single journal, ask: did the error affect the trial balance?
If it did not, the error had two sides, so the correction has two sides and no suspense account is involved. These are the six errors from 3.2: omission, commission, principle, original entry, reversal and compensating.
If it did, the error had only one side, so the correction must use the suspense account as its other side.
Getting this wrong is the single biggest source of lost marks in the topic, because it makes every entry in the answer wrong even when the reasoning was right.
Writing the journal
Three steps, every time:
- Write what the books show now.
- Write what they should show.
- The journal is what moves you from one to the other.
A two-sided error. Repairs of $520 were debited to the machinery account. Machinery is $520 too high; repairs is missing $520. The credit side was correct. Correction: debit repairs $520, credit machinery $520. No suspense.
A one-sided error. Rent of $340 was debited to the rent account but not credited to the bank. Only a debit exists, so the debit column is $340 too big, and suspense holds a credit of $340. Correction: debit suspense $340, credit bank $340.
A reversal. Cash of $210 received from a customer was credited to the bank and debited to the customer, exactly the wrong way round. Both accounts are wrong by twice the amount. Correction: debit bank $420, credit the customer $420.
Reversal errors always need double the original figure, and the doubling is the point most often missed. The correction has to undo the wrong entry and then make the right one, which is two lots of $210.
An error of original entry. A sale to D Silva of $88 was entered everywhere as $80. The books balance, but both accounts are $8 short. Correction: debit D Silva $8, credit sales $8.
The suspense account
The suspense account holds the difference when the trial balance does not agree, so that draft financial statements can still be prepared.
- If the debit column is short, suspense carries a debit balance.
- If the credit column is short, suspense carries a credit balance.
As each one-sided error is corrected, part of the balance clears. When they have all been found, the suspense account is zero. A balance that will not clear means an error is still undiscovered, and the account must never appear in the final statement of financial position.
Statement of corrected profit
Start from the draft profit and adjust for every error that touched the income statement. Errors between two statement of financial position accounts do not change profit at all.
| Error found | Effect on profit |
|---|---|
| An expense was omitted | Deduct |
| An expense was overstated | Add |
| Income was omitted | Add |
| Income was overstated | Deduct |
| A non-current asset was charged as an expense | Add |
| Repairs were added to a non-current asset | Deduct |
| Discount allowed was omitted | Deduct |
| Closing inventory was undervalued | Add |
| Money paid to a supplier posted to the wrong supplier | No effect |
| A receipt posted to the wrong customer | No effect |
Set it out as a list, starting with the draft profit, showing each adjustment with its sign, and ending with the corrected profit. Each adjustment usually carries its own mark, so a correct final figure with no working scores less than a clear list.
Draft profit is $18 400. Rent of $600 was omitted, a sale of $250 was not recorded, and repairs of $900 were added to the machinery account.
Deduct the rent of 600, add the sale of 250, deduct the repairs of 900. The corrected profit is 18 400 minus 600 plus 250 minus 900, which is $17 150.
The knock-on effect
Correcting profit also changes the capital figure in the statement of financial position, because capital includes profit. An answer that adjusts the profit and leaves capital alone has only done half the job, and the statement will not balance.
Common mistakes
- Using a suspense account to correct a two-sided error.
- Correcting a reversal with the original amount instead of double it.
- Adjusting profit for an error that moved figures only between two customers or two suppliers.
- Getting the direction wrong: an overstated expense increases the corrected profit.
- Leaving a suspense balance in the final accounts.
- Forgetting to change capital after correcting the profit.
- Writing "to correct the error" as the narrative instead of saying what was corrected.