Suspense Account – SS2 Financial Accounting Lesson Note (First Term)

A suspense account is a temporary account in which the difference in the trial balance is recorded until the errors are found and corrected.

Behavioural objectives

By the end of the lesson, students should be able to:

• State what a suspense account is.
• List the checks used to locate errors when a trial balance does not agree.
• State the uses of a suspense account.
• Explain how a suspense account is opened.
• Explain how the balance on a suspense account appears in the balance sheet.
• Explain when the correction of an error involves the suspense account.

How do you locate errors when a trial balance does not agree?

Errors made in recording 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 totals do 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 the errors are not found immediately after applying the checklist, the trial balance is balanced temporarily by inserting the difference between the trial balance totals in a suspense account.

What are the uses of a 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. A suspense account provides an account to which an entry (i.e. one aspect of a transaction) can be made until its correct destination (i.e. the account to which it should be posted) is known.

How is a suspense account opened?

A suspense account is opened in the general ledger with a balance on whichever side 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 ₦6,000 less than the total of the debit side, the suspense account will be opened with a credit balance of ₦6,000. 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 found. 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 are errors corrected?

1. The correction of errors requires journal entries, which are 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.

Evaluation

1. What is a suspense account?
2. List four checks you can make when a trial balance does not agree.
3. State two uses of a suspense account.
4. The credit side of a trial balance is ₦6,000 less than the debit side. On which side will the suspense account be opened, and with what amount?
5. How does a suspense account balance appear in the balance sheet?

Assignment

1. Explain the difference between an error that involves the suspense account when it is corrected and one that does not.
2. Explain why final accounts can be prepared after a suspense account has been opened, even when the errors have not been found.