E5: Suspense Accounts

Suspense accounts
Learning
outcomes
❑ Understand the purpose of a suspense account

❑ Identify errors leading to the creation of suspense account

❑ Record entries to a suspense account

❑ Make journal entries to clear a suspense account

What is Suspense Account?

Trial Balance as on 31st March 2008

Particulars Debit Credit
$ $

Cash 12,000

Purchases 4,000

Machinery 7,000

A ( Accounts Receivable) 2,000

Capital 10,000

Liza (Accounts Payable) 3000

Sales 7,000
Suspense A/c 4,000
Diana ( Accounts Payable) 25,00 1,000
21,00
0 0

Total
DEBIT = CREDIT
TRIAL BALANCE CLEARLY DOES NOT BALANCE
Difference in the trial balance is posted to the suspense account.
Journal entries to rectify

Wrong Entries -

❑ Purchase A/c overcast by $ 2,000, in December 2008.

❑ The machine costing $5,000 was wrongly taken as 7,000.

Rectifying Entries

Journal entries

Particulars Debit ($) Credit ($)

Suspense A/c 2000

To Purchases 2000
Suspense A/c 2000
To Machinery 2000
Understand the purpose of a suspense account

❑ A suspense account is temporarily included in a trial balance to balance the

debit and credit totals.
❑ As a temporary measure, the trial balance is ‘made to balance’ by inserting the
difference into a Suspense Account.

Methods of Suspense Account

Suspense
CREDIT > DEBIT Account has a
Debit Balance
Suspense
DEBIT > CREDIT Account has a
Credit Balance
Understand the purpose of a suspense account
❑ I there is any difference in trial balance a suspense account should be opened to eliminate the
difference because it may create an error in final accounts.

❑ The balance in suspense account needs to be scrutinized and eliminated before proceeding to make
financial statements.

❑ In some instances, it is also possible that an accountant might knowingly post entries to the suspense
account, thereby creating an error

Amount In books of
Example Goody Inc
$ 500

Bank of America

The accountant of Goody Inc is not sure which customer has paid the money. The accountant has two
choices:
❑He can make no entries in his books until the matter is resolved and have $500 as a reconciling item on his
bank reconciliation OR
❑ The following journal entry can also be made

Particulars Debit $ Credit $

Cash account 500
Suspense account 500
(Being difference in trial balance hence suspense account created)
Make journal entries to clear a suspense account entries

Exampl
e Amount
$ 51000
For $15,000
Sales
Goods sold Day Book
Raja
n
BUT CORRECT AMOUNT IS POSTED TO RECEIVABLES CONTROL
A/C
Posted Receivables
$15,000 Control
Account
Rectification Entry

Wrong Entry
The following transaction was recorded
Dr Rajan A/c $15,000
Cr Sales A/c $51,000

Correction entry
Correct Entry
Dr Sales A/c 36,000
Dr Rajan A/c 15,000
Cr Suspense A/c $36,000
Cr Sales A/c 15,000
Being goods sold to Rajan, recorded as
$51,000 in sales book instead of $15,000
TTT(Time To Test)

Questions

A salary amount of $3,500 is paid to Sam. The accountant erroneously records the
entry in the debit side of the salary account and in the receipt side of the cash book
.
Answer

Wrong entry
Debit is
The following transaction was recorded as:
not equal
Dr Salary account $3,500
to credit.
Dr Cash account $3,500
Cr ------------------- 0

Correction entry
Correct entry Dr Suspense account $7,000
Dr Salary account 3,500 Cr Cash account $7,000
Cr Cash account 3,500 Being cash paid for salary not recorded in cash
book however Salary A/c debited appropriately.
Example to show the methods of clearing the suspense account and the
journal entries that will be made.

Party Shirts Ltd has drafted its trial balance and has to correct the imbalance by opening a
suspense account having a debit balance of $425.

Trial Balance
Debit Credit Examination has shown that the
$ $ following errors have been made:
Cash 13,700 ❑ Sales were recorded as $10,000 in
Plant & Machinery 13,000 trial balance instead of $11,000.

Capital 15,000 ❑ A purchase invoice of $1,500 was

Trade payables 9,000 omitted from the purchases account.
However, the correct entry was
Purchases 6,000 made in the supplier’s account.
Sales 10,000
❑ A cash discount of $75 is recorded
Trade receivables 3,000 in the receivables ledger but not in
Other expense 2,000 the discounts received account.

Discount received 125 ❑ Collection of $900 from Alistair (a

Suspense 425 customer) is credited to Bob, a
supplier’s, account
Total 36,125 36,125
Continued….
Journal entries to clear the suspense account are as follows:

1. Dr Suspense account $1,000

Cr Sales account $1,000
Being sales account of $11,000 wrongly recorded as $10,000 in the trial
balance, now corrected
The credit balance of the sales account was short on the trial balance.
Therefore we need to credit the sales account and debit the suspense
account.

2. Dr Purchases account $1,500

Cr Suspense account $1,500
Being purchase invoice of $1,500 omitted from the purchases account, now
recorded
Omission of the purchase invoice results in a short debit balance on the
purchases account in the trial balance. Hence we need to increase the debit in
the purchases account and credit the suspense account.

Continued….
Continued….

3. Dr Suspense account $75

Cr Discount received account $75

Being discount received not recorded in the discount received account now
corrected
Due to a one sided posting of the cash discount; the discount received account
has a short credit of $75. Therefore we need to credit the discount received and
debit suspense account.

4. Dr Bob-payable account $900

Cr Alistair-receivable account $900

Being cash received from Alistair wrongly credited to Bob’s account now
corrected
This is an error of commission that doesn’t affect the suspense account. The
amount received from Alistair is not recorded in his account, hence we need to
credit Alistair’s account and debit Bob’s account.

Continued….
After correcting the above errors, the trial balance will be as follows-

Trial balance
Debit Credit
$ $
Cash 13,700
Plant & Machinery 13,000
Capital 15,000
Trade payables 8,100
Purchases 7,500
Sales 11,000
Trade receivables 2,100
Other expense 2,000
Discount received 200
Suspense 0
Total 36,300 36,300

Continued….
Continued….

Dr Suspense account Cr
Date $ Date $
Balance b/d 425 Purchases 1,500
Sales 1,000
Discount
received 75 Balance c/f 0

Total 1,500 Total 1,500

RECAP

❑ RECAP
❑ Did you understand the purpose of a suspense account?

❑ Can you identify errors leading to the creation of suspense account?

❑ Can you record entries to a suspense account ?

❑ Can you pass journal entries to clear a suspense account ?