Rectification of errors and the Suspense Account

An error is corrected by an entry, never by rubbing out. First work out what was done, then what should have been done; the difference is the correction.

Types of errors

Error	Meaning	Does the trial balance still agree?
Omission (complete)	A transaction is not recorded at all.	Yes
Omission (partial)	One side of the posting is left out.	No
Commission	Wrong amount, wrong side, wrong account of the same class, or wrong totalling.	Depends on the error
Principle	Capital and revenue items are confused, such as an asset treated as an expense.	Yes
Compensating	Two errors cancel each other.	Yes

Two families for the purpose of rectification

Two-sided errors affect two accounts by the same amount. They do not disturb the trial balance and are corrected by an ordinary journal entry between those two accounts.

One-sided errors affect only one account (or one column). They disturb the trial balance. If they are found before the trial balance is prepared, they are corrected by a note in the account concerned. If found after, the difference has already been placed in a Suspense Account, and the correction is made through it.

The three-step method

Wrong entry: write what was actually done.
Correct entry: write what should have been done.
Rectifying entry: the entry that turns the first into the second. Often this means reversing the wrong part and adding the missing part.

Solved example

The trial balance of Ganga Stores did not agree. The debit total exceeded the credit total by ₹200, and this difference was placed on the credit side of a Suspense Account. Later these errors were found:

Furniture bought for ₹8,000 was debited to Purchases A/c.
The sales book was undercast (totalled short) by ₹1,000.
Cash ₹2,500 received from Mohan was credited to Sohan.
A credit sale of ₹3,400 to Ritu was posted to her account as ₹4,300.
Rent paid ₹1,500 was not posted to Rent A/c.
The purchases return book was overcast by ₹200.

Rectifying entries
Date	Particulars	Dr. (₹)	Cr. (₹)
1	Furniture A/c Dr.	8,000
	To Purchases A/c		8,000
	(Furniture wrongly debited to Purchases, now corrected)
2	Suspense A/c Dr.	1,000
	To Sales A/c		1,000
	(Sales book undercast, now corrected)
3	Sohan Dr.	2,500
	To Mohan		2,500
	(Cash received from Mohan wrongly credited to Sohan)
4	Suspense A/c Dr.	900
	To Ritu		900
	(Ritu debited ₹900 in excess, now corrected)
5	Rent A/c Dr.	1,500
	To Suspense A/c		1,500
	(Rent paid not posted to Rent A/c)
6	Purchases Return A/c Dr.	200
	To Suspense A/c		200
	(Purchases return book overcast)
	Total	14,100	14,100

The reasoning

Error 1 is an error of principle and two-sided: Purchases has ₹8,000 too much and Furniture ₹8,000 too little. No Suspense is needed.
Error 2. Sales A/c was credited ₹1,000 too little. Only one account is wrong, so the other side of the correction is Suspense.
Error 3 is an error of commission between two personal accounts: two-sided.
Error 4. Ritu was debited ₹4,300 instead of ₹3,400, that is ₹900 too much. Credit her with ₹900.
Error 5. The cash book was credited but Rent A/c was never debited. Debit it now.
Error 6. Purchases Return A/c was credited ₹200 too much. Debit it with ₹200.

Dr. Suspense A/c Cr.
Particulars	₹	Particulars	₹
To Sales A/c	1,000	By Balance b/d (difference in trial balance)	200
To Ritu	900	By Rent A/c	1,500
		By Purchases Return A/c	200
	1,900		1,900

After all one-sided errors are corrected, the Suspense Account closes with no balance. If a balance remains, some error is still undiscovered.

Effect of errors on profit

An error affects profit only if it involves a nominal account (an expense or income) or goods. Ask what the error did to profit; the correction does the opposite.

Error	Effect of the error on profit	Effect of rectification
1. Furniture debited to Purchases	Understated by ₹8,000	Increases by ₹8,000
2. Sales undercast ₹1,000	Understated by ₹1,000	Increases by ₹1,000
3. Mohan and Sohan	No effect (personal accounts)	None
4. Ritu over-debited	No effect (personal account)	None
5. Rent not posted	Overstated by ₹1,500	Decreases by ₹1,500
6. Purchases return overcast	Overstated by ₹200	Decreases by ₹200

Net effect of rectification: profit increases by ₹8,000 + ₹1,000 − ₹1,500 − ₹200 = ₹7,300.

Rectifying one-sided errors before the trial balance

If error 2 had been noticed before the trial balance was drawn, no journal entry would be needed. A line "By Undercasting of sales book ₹1,000" would simply be added on the credit side of Sales A/c. The Suspense Account exists only to hold a trial balance difference.

Errors found in the next year

If errors are found after the final accounts are closed, corrections to expense and income accounts of the past year should not distort the current year's profit. They are passed through a Profit and Loss Adjustment Account, whose balance is transferred to the Capital Account.

Words to know

Undercast: totalled less than the true total. Overcast: totalled more.
Short debit or excess credit: corrected by a debit.
Short credit or excess debit: corrected by a credit.

Questions students ask

What is a Suspense Account?

A temporary account that holds the difference in a trial balance so that final accounts can proceed. It is closed as the one-sided errors behind the difference are found and corrected.

Which errors need the Suspense Account for rectification?

One-sided errors found after the trial balance has been prepared, such as wrong totalling of a subsidiary book or posting a wrong amount to one account.

Does an error in a personal account affect profit?

No. Profit is affected only by errors in nominal accounts and in goods accounts such as purchases, sales and stock.