A Suspense Account is a temporary account used in accounting to record transactions when there is uncertainty or incomplete information about their proper classification. It acts as a holding account until the error is identified or the correct account is determined.
Suspense accounts are important in accounting because they help filter out transactions that cannot be identified at the time of recording. These accounts help to keep the ledger records clean and error-free. The nature of a Suspense Account is temporary where unknown transactions are located, and once the amount is determined correctly, it can be moved to the regular ledger account. It is also very useful while preparing trial balance.
Features of Suspense Account
- It is a temporary account.
- It may have a debit or credit balance.
- It is shown on the balance sheet if not cleared.
- It must be closed after correction of errors.
Reasons to prepare a Suspense Account
1. While Preparing Trial Balance: A Suspense account is useful while the trial balance is being prepared and when the credit balance and debit balance do not match. The difference amount which is not identified can be transferred to the suspense account in trial balance.
2. When Partial Payment is Received: Sometimes, there might be a confusion regarding payments when clients pay a partial amount and the unit to which the invoice is paid is not clear. These payments may be placed on hold by transferring to a suspense account until the customer is contacted and the invoice is determined.
3. When you don't know Who Paid: Suspense account is opened when sometimes, payment may be received, but the company cannot identify the client from whom it is received. The best solution is to transfer the amount to a suspense account and check the unpaid invoices in the register, and then match the payment transaction. .
4. When you don't know how to Categorise Transactions: You may not always know how to categorise transactions when you are a small business owner and not an accountant. In such cases, if you're not sure about where to enter a transaction, then a suspense account is created and corresponding accountant is consulted.
Preparation of Suspense Account
Suspense Account is primarily prepared to rectify all the one-sided errors, which affect the trial balance. It shows the net effect of all the errors of the trial balance. Those errors that do not affect the trial balance are not rectified by the suspense account. Errors are rectified by debiting the correct account and crediting the Suspense account. Similarly, when a correct account is credited, the Suspense account is debited. When all the rectified entries are recorded into a suspense account, it should not be left with any balance. If the suspense account is showing a balance, it means that some errors still exist. Suspense Account comes under current asset or current Liabilities depending upon the transaction. If the Suspense Account shows a debit balance, it is taken to the asset side of the Balance Sheet, whereas if it shows a credit balance, it is taken to the liability side of the Balance Sheet.
Illustration:
Rectify the following errors identified in the books of GFG as on 31 March 2022. The Trial Balance did not match. It shows ₹7,465 being extra credit. Pass necessary journal entries and open suspense account.
- Returns Inward Book was under casted by ₹500.
- A Purchase of ₹1,035 was posted to Creditor's Account as ₹1,000.
- An amount of ₹5,000 owed by Sayeba was omitted from sundry debtors.
- Nupur paid ₹2,500, but her account was wrongly credited with ₹4,500.
Solution:
Journal Entry for Suspense Account
