Principles of Accounting: The Suspense Account

• A trial balance is prepared in order to:
  1. Ease the process of preparing financial statements
  2. To reveal errors
• Errors that are revealed by the trial balance include:
  1. Addition and other arithmetic errors
  2. Single/Incomplete entries into the books
  3. Entering different amounts on the debit and credit sides of the books
• There are some errors that cannot be revealed by a trial balance
• These errors can be corrected by making journal entries and transferring these entries into the relevant books of accounts as soon as the said errors are discovered
• Similarly when there are errors that are revealed by a trial balance an attempt has to be made to find and correct these errors
• Due to circumstances that prevail during the end of trading periods however it might not be possible to find all these errors in time
• In such cases the trial balance can be made to agree by inserting the difference between the two sides in a suspense account
• Consider the following Trial Balance:

• The Debit side was less than the credit side by $550 and the figure is inserted as Suspense
• In the Suspense Account the following entry is made to show this:

The suspense account and The Statement of Financial Position (Balance Sheet)

• Sometimes the errors cannot be found and corrected by the time Financial Statements are prepared
• In such instances the suspense account has to be shown in the financial statements in the Statement of Financial Position
• In instances where:
• The Suspense Account has a debit balance it is shown on the assets side of the balance sheet/Statement of Financial Position
• The Suspense Account has a credit balance it should be included on the capital and liabilities side of the balance sheet
• An example of a debit balance in a suspense account is shown below:

Suspense and Accuracy of the financial statements

• Financial statements are supposed to show a true and fair position of the business
• They are not supposed to be accurate but rather they are supposed to show all material transactions
• Small errors can be squirreled away in a Suspense Account without affecting this true and fair value
• Looks can be deceiving however as it is possible for two very large errors to cancel each other and presenting the impression of it being a small error
• For example Sales are under cast by $5000 while purchases are under cast by $4950
• In such cases, if these are the only errors that occurred we would create a suspense account with a debit balance of $50
• This hides the fact that two large errors occurred
• For this reason the suspense account must only be used as a last resort after thorough investigations have been carried out

To access more topics go to the Principles of Accounts Notes.