Suspense Account: When a trial balance does not agree, efforts are made to locate errors and rectify them. However, if the reason for disagreement in the trial balance cannot be found, a new account called a suspense account is opened to give the trial balance an appearance of agreement. The final accounts are prepared. The debit balance in the suspense account is shown on the assets side while the credit balance is recorded on the liabilities side. Must Check Petty Cash Book.
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Suspense Account
A suspense account is opened in two instances i.e.
(i) To balance a disagreed trial balance: In the trial balance, if the debits are short the difference has to be debited to the Suspense Account and if the credits are short, the Suspense Account has to be credited to make the trial balance agree apparently. Thus trial balance is tallied and final accounts are prepared. Later, when errors are detected, the rectifying entries are passed. The suspense account will show a balance until all entries are corrected. When all errors affecting the trial balance have been rectified using journal entries, the Suspense Account will show no balance.
(ii) To post uncertain items: Sometimes, an item cannot be posted to the correct account because of a lack of information. In this case, the error is rectified using a journal entry opening suspense -account. Thus, a suspense account is opened and is given the debit or credit as the case may be. When debit is short of credit, the difference is debited to Suspense-Account making the debits equal to the credits. Similarly, if in a rectifying journal entry, credit is otherwise short of debit, the difference is credited to Suspense-Account. Later when an error is detected, the rectifying entry is passed.
What type of account is a suspense account?
A suspense account is a holding account found in the general ledger. Depending on the transaction in question, a suspense account can be an asset or liability.
If it’s an asset in question, the suspense account is a current asset because it holds payments related to accounts receivable. A suspense account could also be a liability if it holds accounts payables that you don’t know how to classify. You may also like Rules of Debit and Credit.
Example showing the use of a Suspense Account
Cash received from Unreal Pvt Ltd. for 5,000 is wrongly posted to Unreal Pvt Ltd’s.accountas 50,000, It is however correctly recorded in the cash account.
| Cash A/C | 50,000 |
| To Unreal Pvt Ltd A/C | 50,000 |
FaultyJournal Entry
Because the proper account couldn’t be determined at the time of correction, the journal entry for rectification will be
| Unreal Pvt Ltd A/C | 45,000 |
| To Suspense A/C | 45,000 |
Must Check Basic earnings per share.
