Suspense Account SS1 Book Keeping Lesson Note

The Suspense Account is a temporary account in which the difference in the trial balance is recorded until the errors are located (discovered) and corrected. 

Errors made in the recording of the day-to-day transactions can be divided into those which are not revealed (disclosed) by the trial balance and those which result in the trial balance not balancing.

Where the trial balance total does not agree it is usual to apply the following quick checklist to locate the errors:

1. Check the additions to the trial balance.
2. Check the addition of the balance of each ledger account.
3.  Check that each ledger account balance has been entered in the correct column of the trial balance.
4. Check that every ledger account balance has been entered in the trial balance. 
5. Look for a transaction equal to the difference in the trial balance and check that a double entry has been made for that transaction. 
6. Look for a transaction equal to half the difference in the trial balance and check if it has been entered twice on the same side of the ledger rather than once on each side.
7. Check the double entry for every transaction entered in the books since the date of the last trial balance.

 If after applying the above quick checklist the errors are not found immediately, the trial balance is balanced temporarily by inserting the difference between the trial balance totals in a Suspense Account

USES OF THE SUSPENSE ACCOUNT 

1. A Suspense Account is used to record differences in the trial balance temporarily until the errors are detected and corrected. 
2. A Suspense Account is also used when transactions are recorded in the books before any decision has been made about their proper accounting treatment.
3. The Suspense Account provides an account to which an entry (i.e. one aspect of a transaction) could be made until its correct destination (i.e. the account to which it should be posted) is known

HOW TO OPEN A SUSPENSE ACCOUNT 

A Suspense Account is opened in the general ledger with a balance on whichever side of the Suspense Account that will make the trial balance agree when the balance is inserted in it. For example, if the total of the credit side of a trial balance is N6,000 less than the total of the debit side, the Suspense Account will be opened with a credit balance of N6,000. When the Suspense Account balance is inserted in the trial balance, the trial balance will balance. 

 NB: Once a Suspense Account is opened, the final accounts can be prepared even if all the errors have not been discovered. In this case, the balance on the Suspense Account will appear in the Balance sheet (as an asset if it is a debit balance and as a liability if it is a credit balance). 

HOW TO CORRECT ERRORS 

1. The correction of errors will require journal entries which will be posted to the ledger accounts. 
2. If the error being corrected does not affect the agreement of the trial balance, the journal and ledger entries will not involve the Suspense Account.
3. If the error being corrected affects the agreement of the trial balance, the journal and ledger entries will involve the Suspense Account

STEP (PROCESSES) INVOLVED IN THE CORRECTION OF ERRORS 

To decide how to correct an error, ask the following questions. 

1. How should the transaction have been recorded? 
2. How has the transaction been recorded? 
3. What type of error has been committed by the bookkeeper who recorded the transaction?  i.e. will the error affect or not affect the agreement of the Trial Balance? As indicated above, this step is very crucial to indicate whether the suspense account will be involved in the correction of the error or not. 
4. What entries are required to be passed to correct the error? 

 In applying the steps enumerated above, it is useful to remember the following:

1. An item on the wrong side of an account must be corrected by an adjustment equal to twice the amount of the original error (once to cancel the error and once to place the item on the correct side of the account). Some errors do not affect the double entry: An example would be a debit balance on Rent Account N850 included in the trial balance as debit balance N650. To correct the error, a one-sided entry should be made in the journal and the Suspense Account. Such errors do not require to be corrected by debit and credit entries.

ILLUSTRATION: 

Kehinde extracted a trial balance from her ledgers on 31st December 2017. The trial balance totals were N23, 884 (debit) and N24, 856 (credit). She placed the difference in a Suspense Account. Subsequent investigation into the accounts revealed the following: 

1. The debit side of the Telephone Account had been overstated by N200
2. An invoice sent to Adjumo for N240 had been completely omitted from the books.
3. . A cheque for N124 received from Diligent Enterprises had been posted to the debit of their account
4. The purchase of some office equipment for N1,180 has been debited to Office Expenses Account

Discounts received, N90, had been posted to the purchases ledger but not to the Discounts Received Account. 

Rent paid, N800 had been credited to the Rent Receivable Account.

5. A refund of an insurance premium, N60, had been recorded in the Cash Book but no other entry had been made.

6. A purchase of office stationery, N220, had been debited to the Purchases Account in error.

7.  A credit balance of N30 in the purchases ledger had been omitted from the list of balances extracted from the ledger. The total of the list had been included in the trial balance. 

8. Goods returned to Ready Stores had been credited to the Ready Stores Account and debited to the Purchases Returns Account. The goods had cost N400

REQUIRED:

1. Prepare journal entries to correct the errors indicated above
2. Prepare the Suspense Account showing the opening balance and the correcting entries

GENERAL JOURNAL 

SUSPENSE ACCOUNT