A suspense account is an account opened in the general ledger specifically to record a difference between the debit and credit totals of the trial balance.
Purpose:
- It is used when the cause of a difference on a trial balance cannot immediately be found and corrected.
- By opening a suspense account, a business can calculate the correct total and prepare draft financial statements (such as the income statement and statement of financial position) urgently.
- It can also sometimes be used when transactions are recorded but a decision has not yet been made about their proper accounting treatment (e.g., classifying a mixed invoice as capital or revenue expenditure).
When a Suspense Account is Opened
A suspense account should only be opened after diligent attempts to find the discrepancy in the trial balance have failed.
Before opening a suspense account, certain checks should be carried out:
- Checking the additions of the trial balance.
- Looking for a balance posted to the wrong side of the trial balance (if the difference is divisible by 2, check for a balance of half the difference).
- Looking for transposed digits (if the difference is divisible by 9).
- Checking the totals of the sales ledger balances and purchase ledger balances against the respective control accounts.
- Checking the extraction of balances from the various ledgers.
Mechanism of Opening the Account
The account is opened with a balance inserted on whichever side of the ledger is necessary to make the trial balance agree. For example, if the credit side total is $100 less than the debit side total, the suspense account is opened with a credit balance of $100.
After the suspense account is opened, the cause(s) of the difference must be investigated at the earliest opportunity and corrected. If a small balance remains after all reasonable attempts have been made to find the difference and it is considered immaterial, a business might write it off to the income statement to save time and expense, though these risks hiding large offsetting errors.
Errors that Require a Suspense Account
A suspense account is generally required to correct errors that caused the trial balance to disagree, meaning errors where the principles of double-entry bookkeeping were violated (unequal debits and credits). These types of errors include:
- Partial Posting: When only one half of a transaction has been posted (e.g., crediting the bank account for wages paid, but omitting the debit entry to the wages account).
- Posting to the Wrong Side of an Account: When an amount is posted to the wrong side of an account (e.g., a cheque received from a customer being posted to the debit of their account instead of the credit).
- Posting to the Same Side of Two Accounts: When both entries have been made on the same side of two separate accounts (e.g., crediting both the bank account and the wages account for a wages payment).
- Posting Errors of Different Figures: When entries are made on the correct side of the two accounts, but the figures used differ (e.g., a credit of $230 in the bank account but a debit of $320 in the wages account).
- Errors in Totals/Extraction Affecting Only One Side: When an error affects the trial balance because a total was incorrectly calculated or a balance was omitted from the list of ledger balances, requiring a one-sided adjustment in the general ledger (via the suspense account).
Correction Process and Accounting Entries
The correction of errors requires journal entries. The journal is the book of prime entry for corrections of posting errors, adjustments, and transfers between accounts.
To correct an error involving the suspense account:
- A correcting journal entry is prepared, ensuring debits equal credits.
- This journal entry is then posted to the necessary ledger accounts, including the suspense account.
- When all errors are corrected, the suspense account should never have a balance on it.
It is important to remember that six specific types of error, though they make the ledger balances incorrect, do not affect the agreement of the trial balance and therefore do not require the use of a suspense account. These are: errors of omission, errors of commission, errors of principle, errors of original entry, complete reversal of entries, and compensating errors.
Impact on Financial Reporting
Correcting errors via journal entries affects the nominal accounts (revenue and expense accounts) and asset/liability accounts, necessitating revision of the draft financial statements.
- Profit for the Year: Debit entries to nominal accounts (expenses) in the journal decrease profit, while credit entries (income) increase profit.
- Working Capital: Corrected working capital is calculated based on the journal entries that affect current assets and current liabilities.
When performing corrections, great care should be taken as students often complete the journal entries incorrectly (debiting the account that should be credited, and vice versa) or reverse the entries in the suspense account.
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