3.2 Correction of errors (3)
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1.
The following information relates to PQR Company for the year ended 31 December 2023:
- Revenue: £200,000
- Gross Profit: £60,000
- Administrative Expenses: £30,000
- Interest Expense: £2,000
It was discovered that the gross profit figure was calculated incorrectly. The cost of goods sold was initially calculated as £140,000, but should have been £120,000. Also, £1,000 of administrative expenses were incorrectly omitted from the initial calculation.
Calculate the corrected profit for the year ended 31 December 2023.
Calculation of Corrected Profit
Corrected Profit = Sales - Cost of Goods Sold - Depreciation
Corrected Profit = £150,000 - £90,000 - £5,000
Corrected Profit = £55,000
2.
A company, "Green Growth Ltd", had the following transactions during the year:
- Received £1,000 from a customer for goods sold, but incorrectly recorded it as a credit to the bank account.
- Paid £400 to a supplier for goods purchased, but incorrectly recorded it as a debit to the bank account.
Prepare a suspense account to rectify these errors. Show the calculations and the final balance.
Suspense Account
| Particulars | Debit (£) | Credit (£) |
| Bank (credit) | 1000 | |
| Supplier (debit) | | 400 |
| Balance c/d | 0 | 0 |
Calculation:
Total Debits: £400
Total Credits: £1000
Balance c/d: £1000 - £400 = £600
Final Balance of Suspense Account: £600
3.
A business has prepared its trial balance and discovered it is unbalanced. The following balances are in the suspense account:
Debits: £250
Credits: £180
Explain how the business should proceed to rectify this situation and ensure the trial balance is balanced.
To rectify the unbalanced trial balance, the business must systematically investigate the balances within the suspense account. The process involves the following steps:
- Review Supporting Documents: Examine all relevant source documents (e.g., invoices, receipts, journals) for the period in question. This helps identify potential errors related to transactions that might be missing, duplicated, or incorrectly posted.
- Analyze Suspense Account Details: Carefully examine the individual debit and credit balances within the suspense account. Consider the nature of the amounts (e.g., are they large or small, do they relate to specific accounts?).
- Trace the Balances: Attempt to trace the balances in the suspense account back to the original source documents. This might involve reviewing the journal entries and ledger accounts.
- Identify and Correct Errors: Once the error is identified (e.g., a posting error, an omission), make the necessary adjustment to the correct ledger account. This will involve debiting or crediting the appropriate account.
- Clear the Suspense Account: After the error has been corrected, the balance in the suspense account should be transferred to the correct ledger account. This will bring the trial balance into balance.
The business should document all steps taken to rectify the error, including the nature of the error, the adjustments made, and the supporting documentation.