The popularity of suspense accounts and error correction among examiners stems from how well they test knowledge of bookkeeping principles. An entry that will eventually end up somewhere else once its final destination is known temporarily resides in a suspense account. There are two possible justifications for opening a suspense account:
When errors 1 through 5 are found, a journal entry will be made between the affected ledger accounts to fix them. In order to correct errors 6 through 9, journal entries are also necessary, but one side of each entry will go to the suspense account set up to account for the discrepancy in the records. Type 8, trial balance errors, are different. An entry is required because the error affects the difference and the suspense account records the difference. The trial balance is only modified; there is no ledger entry for the other side of the correction.
It should be noted that this type of question is unlikely to appear on either the FA or FR exam. Any of the errors in the aforementioned question can be tested on either of these exams, but a question on an FA or FR exam is unlikely to test this learning outcome with such a high concentration of marks. Despite this, it is still believed that the above query is beneficial for teaching purposes.
Try answering Part (a) of the question before reading Table 2’s answer. Lets now turn to Part (b). Two columns for – and + are the most practical arrangement for the answer. Set them up and enter the adjustments appropriately. Which of the errors—in fact, all of them—affect the profit? Try Part (b) right away before looking at the solution shown in Table 3.
Suspense accounts explained
When to use suspense accounts
When the sender is unclear
When maintaining accounts for your clients, it’s important to know who made purchases or sent invoices, so if the sender isn’t clear, think about putting transactions into a suspense account. By doing so, you can identify the sender of payments or invoices and record their revenue and expense in the appropriate sections of your clients ledger. You and your client can make sure the right people are sending and receiving payment by using a suspense account for transactions with obscure senders.
When the recipient is unclear
On occasion, invoices or payments for your client may be sent to you without specifying a clear recipient. You could put the money in a suspense account until your client decides who will pay the invoice, for instance, if your client hired a cleaning service but the cleaning service didn’t specify a particular department or person to pay their invoice. In this situation, a suspense account can help you make sure that all expenses and income are tracked correctly so that budgets for all departments can be maintained.
When the reason is unclear
If the source of an expense or revenue is unknown, you can also place a transaction into a suspense account. This may happen if there is an invoice or receipt for a sum of money without a description of the goods or services that generated the expense or generated the payment. The general ledger can remain error-free by placing ambiguous payments into a suspense account until your client clarifies the purpose of the payment.
When your client receives partial payments
If your client receives partial payments or payments in installments for a good or service, this is another scenario in which you should use a suspense account for them. This frequently occurs when businesses offer payment plans or demand deposits or down payments for particular goods and services. Until your client receives the full payment, it is advantageous to record these partial payments in the business’ suspense account. Then, you can transfer the completed transaction to the general ledger to display the total revenue.
When your client hasnt received a purchase
If your client pays for a good or service they haven’t yet received, a suspense account might also be helpful. For instance, if your client orders new office furniture in advance for their company, they won’t get it for a few months after it becomes available. If your client cancels the order or doesn’t receive it, you can record the expense in a suspense account to keep it apart from the total expenses, making it simpler to change or remove the payment from the account.
What are suspense accounts?
Accountants can temporarily record ambiguous transactions for their clients in suspense accounts, which are parts of general ledgers that allow them to keep tabs on a business’s or an individual’s finances. Until you have more information and can place the transaction in the appropriate section of the general ledger, it holds the transaction, or suspends it, apart from revenues and expenses. This makes it possible for you to keep track of transactions that might be flawed, maintaining the general ledger’s accuracy.
Tips for using suspense accounts
Learn how to successfully use a suspense account by referring to the following advice:
Review it daily
Notice patterns
Look for trends in your client’s suspense accounts, such as whether a particular transaction or invoice from a certain sender consistently goes into the suspense account. This will enable you and your client to check for mistakes in those transactions and potentially fix them by getting in touch with the sender.
Take notes
If you put certain transactions into a suspense account rather than another area of the general ledger, it might be helpful to note why. If a transaction has been in the suspense account for some time, noting the cause can help you remember the details you need to unravel it and maintain your client’s finances.
Ask for clarification
It’s critical to ask your clients to clarify any ambiguous transactions even though you may be in charge of their accounting; this will help you record the transactions accurately. Your client may be able to provide helpful details regarding the origin or reason for a payment or invoice, which will enable you to handle these transactions more quickly.
Double-check everything
Consider double-checking your work as you enter transactions into suspense accounts to be reviewed later because accuracy is crucial to accounting. When transferring transactions out of the suspense account, make sure your numbers and details are accurate to prevent errors and maintain the general ledger’s accuracy.
Clear it regularly
Examples of a suspense account
Depending on whether someone is paying your client in an ambiguous transaction or if your client is making a payment to someone else, there are slight differences in how you may use a suspense account. Examine the following instances to better understand how to employ suspense accounts in these circumstances:
Unclear payment example
A client of an accountant contracts with a contractor to make renovations to various areas of their office building. Later, the contractor sends an invoice for $2,000 and requests payment, but they fail to indicate whether this sum covers all of the renovations or just a portion of them. To ask their client about later, the accountant debits the sum from the suspense account and credits the accounts payable with the same amount.
Underpayment example
A client has recently sold several products to another company. The business sends the client $50 in payment, but the client’s accountant notices that the amount might be incorrect and should actually be closer to $500. While waiting for more information, the accountant debits $50 from a cash account and credits $50 to a suspense account.
FAQ
What is suspense account with example?
Suspense accounts contain entries where there are uncertainties or discrepancies. For instance, if someone deposits money but inadvertently writes down the wrong account number, the money will be kept in a suspense account until the mistake is fixed.
What is suspense account explain?
An account used to temporarily hold transactions for which it is unclear where they should be recorded is a suspense account. The transaction is moved out of the suspense account and into the appropriate account(s) once the accounting staff has looked into and clarified the purpose of this kind of transaction.
Which type of account is suspense account?
In the general ledger, a suspense account is a holding account. A suspense account can either be an asset or a liability, depending on the transaction in question. The suspense account, if it is an asset, is a current asset because it contains payments for accounts receivable.
Is suspense account debit or credit?
If your trial balance debits exceed your credits, the discrepancy is recorded as a credit in the suspense account. The difference is then recorded as a debit in the suspense account if the trial balance credits are greater than the debits.
