ZIMSEC O Level Principles of Accounts Notes: The Suspense Account
- A trial balance is prepared in order to:
- Ease the process of preparing financial statements
- To reveal errors
- Errors that are revealed by the trial balance include:
- Addition and other arithmetic errors
- Single/Incomplete entries into the books
- 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:
| Description | DR $ | CR $ |
| Capital | 15 000 | |
| Land and Buildings | 10 000 | |
| Motor Vehicle | 3 000 | |
| Furniture and Fittings | 2 000 | |
| Trade Creditors | 2 000 | |
| Bank Loan | 3 000 | |
| Trade Debtors (Accounts Receivable) | 3 000 | |
| Cash at Bank | 2 500 | |
| Cash in Hand | 500 | |
| Sales | 12 000 | |
| Purchases | 9 000 | |
| Advertising | 600 | |
| Packaging | 850 | |
| Suspense | 550 | |
| Total | 32 000 | 32 000 |
- The Debit side was less than the credit side by $550 and the figure is inserted as Suspense
- In the Suspense Account the following entry is made to show this:
| General Ledger | ||||||
| Suspense Account | ||||||
| Date | Details | Amount($) | Details | Amount | Amount($) | |
| 31 May | Trial Balance Difference | 550 | ||||
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:
| $ | $ | |
|---|---|---|
| Fixed Assets | ||
| Buildings | 85000 | |
| Fixtures | 1058 | |
| Vans | 16400 |
|
| Total Fixed Assets | 102500 | |
| Current Assets | ||
| Stock | 16280 | |
| Debtors | 31300 | |
| Bank | 14590 | |
| Total Current Assets | 62170 | |
| Less: Current Liabilities | ||
| Creditors | (15910) | |
| Working Capital | (46,260) |
|
| Suspense | 42 | |
148760 |
||
| Capital (opening balance) | 114202 | |
| Add Net Profit | 64558 |
|
| 178760 | ||
| Less Drawings | 30000 |
|
148760 |
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.
