What is a Suspense Account?
A suspense account is a temporary account created to adjust the difference in the trial balance due to the occurrence of an error or errors in the books of an account pending the determination of their actual locations.
In other words, it’s an account where the difference between the two sides of the trial balance is temporarily posted until the exact position of the errors is determined.
A suspense account is also known as a difference in books account or an error account.
Example of Suspense Account:
The example of suspense account is as follows:
|SN.||Title of the Accounts||L/F||Debit|
* Suspense A/C = Difference between debit and credit = ($20000-$12,000-$2,000)
Why Suspense Account is Created?
Some errors may not be found until the end of the fiscal year. As a result, the trial balance will be invalidated.
However, due to the accounting year’s end, the preparation of the trading and profit and loss account, as well as the balance sheet, cannot be delayed.
In such cases, a suspense account is created up to adjust the balance and continue with the trading, profit and loss account, and balance sheet.
In reality, under a double-entry bookkeeping method, every kind of error is bound to be identified sooner or later.
When such an error or errors are identified, compensating journal entries are passed through the suspense account to correct them.
The suspense account is debited or credited in case of rectifying journal entry and with the rectification of all the errors of the preceding accounting period. The suspense account will be removed from the books of account automatically.
How to Present Suspense Account in the Balance Sheet?
It should be noted that the balance of the suspense account should not be closed by transferring it to the trading and profit and loss account; instead, it should be included in the balance sheet so that it can be carried forward in subsequent years’ books of account and corrected from time to time as errors are detected.
- If the balance of suspense account shows the debit balance, it is recorded on an asset side in the balance sheet.
- If the balance of suspense account shows the Credit balance, it is recorded on a liability side in the balance sheet.
The suspense account will be written off from the books of account after all of the errors have been detected and corrected.
How to Close a Suspense Account?
If we look at the example above, we see that $6,000 is showing here as a suspense account.
It was later found that the salary payment of $6,000 was shown less in the salary account. In this case, if we provide the following accounting journal entry
The salary account will be increased by $6,000 and the Suspense account will be decreased by $6,000, as a result, the suspense account will be zero and closed.
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