Although bookkeeping is supposed to be accurate, it might happen that some errors are made. Obviously, it will be necessary to find out why and correct the mistake. If the error cannot be found, it is necessary to insert a Suspense Account. This account is created to make the Trial Balance equal on both sides, in other words, to balance. If the error is not found before the financial statements are prepared, the Suspense Account will be included on the Balance Sheet as either a current asset or a current liability.
Here are its basic characteristics:
- resolve problem/ambiguity
- zero balanced by posting to correct account
- balance indicated transactions in suspense/resolution
- track problems/errors.
When to Use Suspense Account
The Suspense Account is a bit like the space under the stairs – it is where accountants put transactions when they are not sure what to do with them. This is a temporary account in accounting records. It is to be cleared once the errors are found and/or the bookkeeper has access to sufficient information about the transaction to add adjusting entries to the ledger.
There are a few errors that are shown or revealed by the Trial Balance, which requires a Suspense Account creation:
- Part omission (e.g. only one side of the transaction is recorded)
- Part original entry (e.g. one account is debited for $78 and other is credit for $87)
- Recording twice either in debit or credit
- Overstated or understated in the Trial Balance
The Suspense Account is added to the end of a Trial Balance because a bookkeeper of a business is unable to balance the Trial Balance as the error or errors cannot be found quickly (for the time being, it cannot be found, but maybe we can find the error). The suspense account will have a debit or credit balance, depending on which side we are short. This will make both columns balance. Here, we are putting in the errors which led to the Trial Balance not balancing.
Since the credit column was too high, we added a balancing Suspense Account with a $24,000 debit balance. If it had been the other way around – with the debit column being too high – we would have added this amount to the credit column.
In addition to adding this account to the Trial Balance, we have to create a separate Suspense Account in the ledger. It would look something like this:
Once we have identified the errors, we can start to “tidy out” the Suspense Account, eventually bringing it back to a zero balance. For example, it was found that payment for office desks and chairs has been entered in the Furniture account as $1,500 instead of $5,100. We will record the difference between the two ($5,100 – $1,500) in the Suspense Account and make an adjusting entry to the Furniture account.
It was also determined that the Cash balance is higher than what was reflected in the Trial Balance and equals to $6,800. The loan was also partially repaid, decreasing the Loan account balance by $2,400. Accordingly, these corrections will be added to the Suspense Account and respective accounts. As you can see, the bookkeeper still has to find errors that caused a $15,400 difference.
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Author: Charles Lutwidge