Suspense accounts
This chapter introduces the suspense account. A suspense account is a temporary account used when errors cause the trial balance not to agree, and one side of the double-entry is unknown. You’ll see why it’s used, how it arises, and how to use it (and clear it) through the correct journal entries.
Learning objectives
By the end of this chapter, you should be able to:
- Explain the purpose of a suspense account.
- Identify errors leading to the creation of a suspense account.
- Record entries in a suspense account.
- Prepare journal entries to clear a suspense account.
Introduction
In earlier illustrations, the general ledger accounts affected by each error were known. That made it possible to pass journal entries directly to the correct ledger accounts.
In practice, you may discover an error but still be unable to identify one of the affected general ledger accounts before the financial statements are prepared. When that happens, you use a suspense account.
A suspense account acts as a holding general ledger account for:
- discrepancies,
- unidentified items, and
- unbalanced entries.
Once the missing information is found, you pass journal entries to transfer the amount from the suspense account to the correct general ledger account(s). This process should clear the suspense account balance.
Suspense account: Passing journal entries to correct errors
Correcting errors using a suspense account follows the same approach as in the earlier chapter. The key difference is that, here, one of the general ledger accounts is unknown (or the information is uncertain). Until the correct account is identified, the amount is posted to the suspense account. If the error leaves total debits different from total credits, one side of the correction goes to suspense; if both accounts affected by the error are known and the trial balance still balances, no suspense entry is needed.
Let’s work through an example.
Illustration: Suspense account
The following errors were discovered in the books of a sole trader after the trial balance totals failed to agree. The difference was $2,200, and it was credited to the suspense account. The trial balance debits exceeded the credits by $2,200, so suspense was credited to make the totals agree. When credits exceed debits, suspense is debited instead. To correct each error, post the entry to the account you know, and suspense takes the other side.
You are required to pass the necessary journal entries to correct the errors in each of the transactions that follow.
- A credit sale of $2,500 to Kwame was correctly posted to the receivables control account but omitted from the sales general ledger account.
Do you know the answer?
This is a single-entry error. Only one side of the transaction (the debit to Receivables) was recorded, while the corresponding credit to the Sales account was omitted.
Receivables were already posted correctly, so the missing entry is the credit to Sales. To complete the double entry, we use the suspense account for the other side:
Dr. Suspense $2,500
Cr. Sales $2,500
(To record omitted credit to Sales where the receivable was already posted)
- Rent expense of $800 was debited to the rates expense general ledger account.
Do you know the answer?
This is an error of commission. The entry was made in the wrong account of the right type (rates expense instead of rent expense; both are expenses). Both accounts are known and affected by the error, so a suspense account is not needed.
Dr. Rent Expense $800
Cr. Rates Expense $800
(To reverse wrong posting and charge rent to expense)
- A payment of $1,200 to a supplier was correctly entered in the cash book but not posted to the payables control account.
Do you know the answer?
This is a single-entry error. The cash payment was recorded, but the corresponding posting to the payables control account was omitted.
Cash has already been reduced, but payables have not been reduced. To correct the missing posting, we reduce Payables and use Suspense for the other side:
Dr. Payables $1,200
Cr. Suspense $1,200
(To record the omitted posting to payables - cash side already in cash book so we offset with Suspense)
- A motor vehicle purchased for $15,000 was debited to the purchases general ledger account.
Do you know the answer?
This is an error of principle. A motor vehicle is an asset, but it was recorded as purchases (an expense/cost of sales category).
Dr. Motor Vehicles $15,000
Cr. Purchases $15,000
(To transfer the purchase from Purchases to Motor Vehicles)
- A credit purchase of $4,300 from Afia was entered correctly in the purchases account but posted to the payables control account as $3,400.
Do you know the answer?
This is an unequal posting error (the amount posted to the payables control account is incorrect).
Purchases was debited $4,300 but payables was credited only $3,400, so the trial balance debits exceeded credits by $900; the correction credits payables and debits suspense.
Dr. Suspense $900
Cr. Payables $900
(To correct the understatement of the payables control account)
Now, draw up the suspense account to show how the errors are corrected.
Suggested solution
The $2,200 credit marked with an asterisk is the original trial balance difference. After entries 1, 3 and 5 are posted, both sides total $3,400 and the suspense account has a nil balance, which shows the trial balance now agrees.