In the accounting world, suspense accounts are temporary accounts that hold those financial transactions that an accountant keeps temporarily to use in the future with the relevant account heads. They are used sometimes used as total accounts, whereas in other cases, they arise from differences while making a trial balance. Even in the latter case, they are adjusted after finding out the differences. Suspense accounts are often used by accounting firms offering the best accounting services, as it allows instant identification and ramification for any mistakes in each account.
Use as a total account
Suspense accounts may be created for each category of asset or liability as required. For example, a suspense account of accounts receivables may be created to initially record all payments received from a party. This allows for quicker data entry. The account will then be reviewed by a senior official who may post adjustments along with checking for supporting documents. This way, the closing balance of the suspense account will be nil, or an amount that has not yet been adjusted but will be subsequently. However, suspense accounts should show a zero balance at the time of closing.
Illustration of total account
A business makes credit sales of $100,000 in a month. The sale is made up of two major contracts amounting to $35,000 and $40,000. The remaining $25,000 records revenue recognised against several smaller contracts. The accountant can record these smaller contracts in a suspense account at initial recording. During the closing period (the last days of the month), he will create new ledgers for each relevant party and adjust the suspense account against the newly created receivables accounts.
For correction of errors in trial balance
When the trial balance is not in balance, the difference is put into a suspense account. This newly created balance is then adjusted when errors are found out and are corrected. There are three types of errors that may result in the creation of a suspense account:
• addition errors – when figures in a ledger are incorrectly added, it may also be called casting error;
• posting error – when only one side of an entry is posted and the other one is omitted by mistake; and
• trial balance error – when a mistake is made when collecting data for creation of the trial balance.
Illustration of error correction
While creating the trial balance, an accountant noticed a difference amounting to $25,365 in the trial balance’s debit side. He created a single entry to tally the trial balance. Later, he reconciled the balance in detail and found that he had omitted a receivable amounting to $22,000. Therefore, he creates another single entry and adjusts the trial balance. The remaining balance is the suspense account amounting to $3,365.
The accountant further finds that he had posted a credit entry in sales and a credit entry in cash amounting to $1,500, thus creating an extra credit balance. He corrects this by posting an amount of $3,000 in the debit side of the cash account and on the credit side of the suspense account. The remaining $365 was an error made in the totaling of a page of the ledger, which was corrected and an adjustment posted.
However, always remember the following principles:
• An item on the wrong side of an account must be corrected by an adjustment equal to twice the amount of the original error (once to cancel the error and once to place the item on the correct side of the account).
• Some errors do not affect the double entry. An example would be a balance on a sales ledger account copied incorrectly onto a summary of balances for inclusion in the trial balance. The summary of balances should be amended and a one-sided entry in the journal prepared to correct the Suspense account. Such errors do not require to be corrected by debit and credit entries.