Suspense Account

Suspense account is a little bit trickier than previous topic on Correction of Errors not affected by Trial Balance. There are more or less the same thing, involving correction of errors too. But obviously, it will get you from thinking, what will be the circumstances to use Suspense and what are the time to use Correction of Errors not affected by Trial Balance?

To make it a little bit clear, I throw out two circumstances,

1) You made a mistake of overlooking a transaction. (*overlooked means ignored or neglected) and

2) You made a mistake of entering a debit side of $100 and a credit side of $1,000 in the credit side.

The first instance will not affect the Trial Balance since both sides are ignored at the same time, thus giving you the same equal balances on debit and credit sides.

As for the second instance, you realized that there is a difference, a $900 differences in the debit side and the credit side. You can draw a conclusion that errors that do affect the Trial Balance will result in the need for suspense account. Suspense account is therefore any differences used to re-balance the trial balance. For the error in second instance, you will need to have a suspense account in the debit side of $900 in order to bring debit side to $1,000 (to equate them as the credit balance.)

Mistakes are commons in accounting. So real accountants will indeed be forced to use suspense account to re-balance their trial balance. However, suspense account consists of  errors (multiple of them, you won’t be tested by correcting only one error, that will be too easy!) that must be corrected. –> the MAIN FOCUS of EXAM (I am not saying that Correction of Errors not Affecting Trial Balance is not important, they are equally important.)

Whatever the reasons of errors, you must realized that the combined correction of errors should be reduced back to zero. And one thing to bear in mind is that you only made one correction instead of two in Correction of Errors not Affecting Trial Balance. Essentially, one entry has been made correctly but not the subsequent entry –> which resulted in a difference in Trial Balance.

A comprehensive question involving suspense account could include testing on Trial Balance, Correction of Errors, Suspense Account, recalculation of adjusted profit and maybe reproducing a Profit and Loss or Balance Sheet statement.

Note that Profit and Loss is also called Income Statement and Balance Sheet is also called Statement of Financial Position (you must start to know them as most revised textbooks have started to use those names and you will probably see extinction in using Profit and Loss and Balance Sheet names in few years time.)

This post is still ongoing. 15th May 2013