What is Suspense Account?
This is a temporary accounts maintained in the Genera Ledger. The purpose of maintaining suspense accounts is to carry the doubtful amounts of which can either be a payment or a receipt and is recorded to equal the total debit and credit side of the Trial Balance.
This account is temporarily used in general ledger to show the doubtful amount of which exact head of accounts can not be identified. Suspense account is carried on until this is properly analyzed and classified and identified.
Reasons of Creating Suspense Account
For the following reasons an accountant creates suspense account:
- When a bookkeeper is not sure where the transactions should be posted. In this case, the bookkeeper may enter the amount into suspense account as a pending transaction.
- When there is a difference in a trial balance, the accountant creates a suspense account to make equal debit and credit amount.
Errors considered in Suspense Account
All types of errors don’t affect suspense account. Following table shows the types of errors and their involvement in suspense account:
| Error type | Clarification | Suspense account involved? |
|---|---|---|
| 1 Omission | As the transaction is not recorded at all, it will not be the part of suspense account. | No |
| 2 Error of commission | Transaction is recorded into the correct side of the wrong account. As debit and credit are equally posted, two side is balance. | No |
| 3 Error of principle | Transaction are posted to the correct side of the wrong account. Say for example, Plant Repairs (expenses) are debited to Plant Account (Asset). Two sides are balance. | No |
| 4 Error of original entry | An incorrect figure is entered in the records and then posted to the correct account. Say for example: Cash paid $ 1,000 is wrongly recorded as $ 100 and posted in the account $100. Though wrong amount but posted equally , hence two side will balance. | No |
| 5 Reversal of entries | The amount and accounts are correct, but the account that should have been debited is credited and vice versa. Example: Factory employees are used for plant maintenance: Correct entry: Debit: Plant maintenance Credit: Factory wages Easily done the wrong way round | No |
| 6 Addition errors | The amount are incorrectly added in a ledger account. | Yes |
| 7 Posting error | a. an entry made in one record but not posted at all b. an entry in one record is incorrectly posted to another Examples: cash $10,000 entered in the cash book for the purchase of a car is: a. not posted at all b. posted to Motor cars account as $1,000 | Yes |
| 8 Trial balance errors | Balance is omitted, or incorrectly recorded in preparing the trial balance. | Yes |
| 9 Compensating errors | two equal and opposite errors leave the trial balance balancing. | Yes, to correct each of the errors as discovered |
Examples
XYZ Ltd. received cash $ 3,000 from ZHL ltd. which is wrongly posted as $ 30,000. It is however correctly in the cash account.
| Cash A/C | 30,000 |
| To ZHL Pvt. Ltd. | 30,000 |
Rectification entry
Considering the fact that the proper account couldn’t be determined at the time of correction, the journal entry for rectification will be
| ZHL Pvt Ltd A/C | 27,000 |
| To Suspense A/C | 27,000 |
When does this accounts create?
Suspense Accounts creates for various reasons. We are discussing some of the reasons as presented below:
Difference found in Trial Balance :
Trial Balance is the closing balance of an account which is prepared to know the arithmetical accuracy of the company. If debit and credit of trial balance is not equals, the suspense account is created to prepare the financial statement of the company and the suspense account will be closed appropriate cause of difference is found.
When the credit side of trial balance is larger than debit side, the difference will be shown in Debit side. When the debits side are larger, the difference will be shown in credit side.
When invoice Payment received partially and customers reference is not found:
Sometimes business receives partial payment from its customers and is unsure about which invoice are paid. In this respect, the partials payments hold in the suspense account until contact with the customers. When invoice reference is found, close the suspense account and moves the amount to the correct account.
When invoice Payment received fully but customer reference is not found:
Sometimes you may got full payment from your customers but you unsure who paid to your account. In this situation, a suspense to be created. After getting the invoice reference and details of customers, you will close the suspense accounts and transfer the amount to appropriate heads.
When you buy fixed assets under but assets is not received:
When any fixed assets purchase on a payment plan but don’t receive it until the full payment is made. The assets will be recognized at the time of paid the full installments. Before that a suspense account may be created.
When a business owner records the transactions:
Sometimes the owner of business may record the transactions of the business, and if he is a non-accountant he may not know how to account for. In this case he may keep all the records in suspense account. After discussing with his accountant he may close the suspense account and transfer it to the appropriate heads.
What happens if the account is not closed?
If suspense account is not closed at the end of accounting period, the difference shown in trial balance to be shown in asset side or liability side. If the credit balance is higher, the difference to be shown on debit side i.e asset side on the balance sheet. If debit side is higher, the difference to be shown on credit side i.e liability side on the balance sheet.