Correction of Errors and Suspense Accounts

Correction of Errors

Types of Errors:

Errors of omission: When an entire transaction is neither debited nor credited in the accounts.
Errors of commission: Occur when an item is entered correctly in terms of the amount but in the wrong account.
Errors of principle: When a transaction that breaches the fundamental principles of accounting.
Errors of original entry: When the incorrect amount is entered on both debit and credit sides.
Compensating errors: Mistakes made in two or more accounts that result in an overall correct total balance.

Correction Process:

Effects of Errors:

Errors can distort a company’s financial statements, making them inaccurate and unreliable.
Errors may lead to flawed business decisions as they are often based on the company’s financial data.

Definition:

A suspense account is a temporary account used to record discrepancies in the ledger.
It’s used until the cause for the difference is found and corrected.

Usage of Suspense Accounts:

When an error that does not affect the trial balance is found, a suspense account is used.
The discrepancy amount is held in the suspense account until it is resolved.

Clearing Suspense Accounts:

Once the error is found and corrected, the suspense account should be zeroed out.
If there is a remaining balance, it indicates that not all errors have been identified and corrected.

Purpose of Suspense Accounts:

Helps keep the trial balance in balance during the process of investigating and correcting errors.
Helps maintain the integrity and accuracy of financial reporting.