Suspense accounts are used when your trial balance is out of balance or when you have an unidentified transaction. The suspense account is a general ledger account that acts as a holding account until the error is discovered or the unknown transaction is identified. When working with the trial balance, you can open one suspense account to hold all of the discrepancies until you find them. However, suspense accounts are temporary accounts that must be closed by the end of your accounting cycle
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 Suspense Account and if the credits are short, Suspense-Account has to be credited to make 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 balance until all entries are corrected. When all errors affecting the trial balance have been rectified by means of 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 lack of information. In this case, the error is rectified by means of journal entry opening suspense -account. Thus, 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 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.
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. account as 50,000, It is however correctly recorded in the cash account.
|To Unreal Pvt Ltd A/C||50,000|
Faulty Journal Entry
Considering the fact that 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|