Contra Entrys/Suspense account/Entries reversed. Can somebody please explain??

System

Hi
The entries to record a cheque received froma credit customer of £250 have been reversed.
What accounts do you debit/credit and what amounts??

Alsio, don't understand suspense account and contra entry

Can anyone help

System

Re:Contra Entrys/Suspense account/Entries reversed. Can somebody please explain??

The original entries when the sale was made to the credit customer would have been (assuming no VAT):

Debit debtors £250
Credit sales £250

When the customer paid the £250 the entries would have been:

Debit bank/cash £250
Credit debtors £250

Presumably the cheque has bounced so you need to reverse the entries above:

Credit bank/cash £250
Debit debtors £250

As the customer still owes the money.

As far as suspense accounts are concerned these are opened up when the bookkeeper does not know the corresponding debit or credit entry for a transaction. So, if a payment out of the bank was made this would be credit bank, if you don't know where the debit should go, debit suspense. I think you should do this in the exam if you are uncertain of the correct treatment of a transaction. In other words suspense accounts are "holding" accounts which are cleared out after further investigation.

Contra entries are simply entries which cancel eachother out. For example, if you buy from supplier A who is also a customer of yours and you owe your supplier £200 and he owes you £250 - rather than he pay you £250 and you pay him £200 he could simply pay you £50 and you then "contra" the balance of £200. This is quite common in industry where a supplier is also a customer.

Kind regards
Steve

System

Re:Contra Entrys/Suspense account/Entries reversed. Can somebody please explain??

Steve's example above shows how to reverse out a bounced customer cheque whereas my example that follows is for a mispost with the incorrect accounts debited/credited for the payment received. Therefore, I'm assuming that the incorrect entries made when the cheque was processed were;

Credit bank account £250 (should have been a debit entry)
Debit sales ledger control account £250 (should have been a credit entry)

Therefore, we would need to write a journal correcting this mispost which can be done in two ways;

Debit bank account £250
Credit sales ledger control account £250
(This restores the accounts back to their pre-error status then);
Debit bank account £250
Credit sales ledger control account £250
Which is how the entries should have originally been done. I know the AAT prefer it this way since it corrects the original error and then carries out the correct transaction.

However, the quicker real life way would be to just;
Debit bank account £500
Credit sales ledger control account £500

A suspense account at Foundation level is temporarily opened when you carry out an initial trial balance and the debits and credits don't add up. For example, this might be used when preparing month end figures for management where you may not have time to look for the error before submitting the report. Once submitted, you would then look for the original error that caused the imbalance and reverse it back out of the suspense account. Also, as Steve says above, we might often use a suspense account if we see a payment that has left the bank account but don't yet know what it's for.

For example;
Credit bank account; £250 (payment made to an unknown supplier or expense)
Debit suspense account; £250

If we then received the bill later for £250 for say car washing we would;
Credit suspense account; £250 (reducing it back to zero)
Debit vehicle expenses account; £250

Contra entries are where you may buy and sell from the same customer/supplier. If you owe and are owed £100 by the contra customer/supplier, instead of each party physically writing out a cheque for £100 you can both agree to contra the amount from your records. This is essentially a paperless 'payment' that won't show through the bank account since no physical money actually changed hands on either side even though all bills were settled.

Regards,

Robert

EDIT: Damn - you beat me again Steve!