Which of the following statement is true?

Q: Which of the following statement is true ?

Which of the following statement is true ?

Question

Accepted Answer

The correct option is 3:
When errors are detected after preparation of trial balance, suspense account is opened. This statement is true because the primary purpose of preparing a Trial Balance is to check the arithmetical accuracy of the ledger. If the total of the debit and credit sides of the Trial Balance do not match, it confirms the existence of one or more errors. To avoid delaying the preparation of the final accounts (Trading, Profit & Loss Account, and Balance Sheet), a temporary account called the Suspense Account is opened. The difference in the Trial Balance is posted to this account, which forces the Trial Balance to agree, allowing the final statements to be prepared. The accountant then investigates to find and rectify the errors, which ultimately leads to the closing balance of the Suspense Account becoming zero.

The incorrect option is 1:
Rent paid to landlord of the proprietors house, must be debited to Rent Account. This is incorrect based on the Business Entity Concept of accounting. This concept treats the proprietor and the business as two separate and distinct entities. Any rent paid for the proprietor's personal residence is not a business expense, but rather a personal expense of the owner. Consequently, such a payment is considered a withdrawal of cash from the business and must be debited to the Drawings Account, not the Rent Account.

The incorrect option is 2:
On purchases of furniture the amount spent on repairs should be debited to repairs account. This is incorrect as it violates the classification of expenditure between Capital and Revenue. When a fixed asset like furniture is purchased, any expenditure incurred to make it ready for use, including initial repairs or installation charges, is considered Capital Expenditure. Capital Expenditure should be added to the cost of the asset and thus debited to the Furniture Account. Debiting it to the Repairs Account (a Revenue Account) would understate the asset's value on the Balance Sheet and incorrectly reduce the current year's profit.

The incorrect option is 4:
If the errors are detected after preparing trial balance, then all the errors are rectified through suspense account. This statement is factually incorrect because the Suspense Account is only necessary to rectify one-sided errors, which are the ones that cause the Trial Balance to disagree. Errors that do not affect the equality of the Trial Balance (known as two-sided errors or errors of principle, omission, or compensating errors) are rectified by passing a simple correcting journal entry that credits and debits the correct accounts. Therefore, not all errors detected after the Trial Balance require the use of the Suspense Account for their rectification.