Day: March 25, 2020

If there is a material (significant) debit balance on a suspense account . . .?

Select ONE answer:

1. it should be included as an asset in the balance sheet
2. it should be included as an expense in the profit and loss account.
3. it should be included as a liability in the balance sheet.
4. the underlying error(s) should be located and corrected before preparing financial statements.

 

Show your workings to arrive at your answer, and explain and justify your reasons:

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This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 4

1. Not correct – Including a material debit balance on a suspense account as an asset in the balance sheet may overstate assets as the reason for the debit balance on the suspense account may be unrecorded expenses.
2. Not correct – Including a material debit balance on a suspense account as an expense in the profit and loss account may understate profit as the reason for the debit balance on the suspense account may be unrecorded assets.
3. Not correct – A debit balance on an account cannot represent a liability. A liability has to be a credit balance. A debit balance can only be either an asset or an expense.
4. Correct – If the underlying error(s) are not located and corrected before preparing financial statements the financial statements may be materially incorrect (they will be materially incorrect unless some of the errors discovered offset each other).

 

 

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