Suspense Account: Meaning and explanation

Suspense account

Suspense Account: –

The suspense a/c is that account in which we have to record all those business transactions which have incomplete information. Sometimes, An accountant did not have proper information about the transaction but he has to record all the business transactions, So he will open an account named suspense account and record these all transactions in this account. When he got proper information about these transactions he will transfer these transactions to related Ledger account and closing the Suspense account.

The suspense account temporarily holds the transaction while an accountant gets the whole information about this. This account helps an accountant to remember the transaction which needs improvement.

Type of Suspense Account:

It may be treated as an asset account or a liability account. When it has a debit balance then it is treated as an asset account and when credit balance then is treated as a liability account.

For Example: –

Payment received in the bank account but the name of Customer(trade receivable) is not clear in the bank passbook. So, we will post this transaction in the suspense account by credit this account. When we get to know the name of the Customer(trade receivable) then we will transfer this transaction in the customer account.

In the above-said example, this account will be treated as a liability account because it has a credit balance.

The need for Suspense account: – 

  1. In the case of Preparation of Trial Balance and total of the Trial was not agreed then we will need to open the suspense account and transferred the difference into it.
  2. With the help of this account, an accountant can Be Locating the Errors done in the past.
  3. This account will provide information about the nature of the Error account because it provides the balance of the suspense account(Debit or Credit).
  4. It helps in the Rectification of the one-sided error.
  5. It also helps in the Preparation of Final accounts because final accounts are based on the trial balance so if the trial balance has disagreed then how accountant will prepare the final accounts.

When to use suspense account:

There are several situations for holding transaction in a suspense account. Further explained as follows: –

1. Don’t know about sender or payer: –

At the time of receiving payment in the bank without the information of the sender or payer then we will post this transaction into the suspense account till we did not get to know the name of the sender or payer or customer or trade receivable.

For Example: –

Date 01/11/2018, The bank statement shows the credit entry of Rs 15,000/- But in narration name of the sender or payer not mention.

Solution: –

In this case, we open a suspense account and posted the journal entry with the help of it. This process is shown below: –

Date  Particulars   L.F. Debit  Credit
01/11/2018 Bank A/c Dr. 15,000
To Suspense a/c 15,000
(Being the payment received in the bank but the sender name was not clear. So, transferred to Suspense a/c)

After making the connection with the sales team or marketing team by accounts branch, they will get to know the actual name of the sender or payer or customer(M/s A&b Co. Ltd.). Then we have to close the suspense account and transfer the transaction to the original account shown as follows: –

Date  Particulars   L.F. Debit  Credit
01/11/2018 Suspense A/c Dr. 15,000
To M/s A&b Co. Ltd. a/c 15,000
(Being the name of the customer is got now, so amount transferred to the original linked account)

2. There is a difference in the trial balance: –

The total of both sides of the trial balance is always agreed or matched with each other. So, In the case when these have disagreed, we will prepare new accounts named suspense account and the amount of difference will be posted into it and it will be shown on the shorter side of the trial balance.

For Example:-

The following Trial balance of Ms. Ram & Sons as of 31/03/18.

Particulars L.F. Debit  Credit
Capital 10,00,000
Cash 25,000
Bank 3,25,000
Furniture 150,000
Land and Building 10,00,000
The loan from Mr. A 5,00,000
Salary 2,00,000
Wages 1,00,000
Purchases 10,00,000
Sales 15,00,000
28,00,000 30,00,000

Solution: –

There is a difference in the trial balance total of both sides.

The total credit side is more than the total of the debit side. So, we will transfer the amount of difference between both sides to the suspense account and record it on the shorter side shown as follows: –

Difference =  Total of Debit – Total of Credit

Difference =  28,00,000 – 30,00,000

Difference =  2,00,000

So for the time being, Rs 2,00,000 will record in the suspense account

Trial Balance of Ms. Ram and sons as on 31/03/18
Particulars L.F. Debit  Credit
Capital a/c 10,00,000
Cash a/c 25,000
Bank a/c 3,25,000
Furniture a/c 150,000
Land and Building a/c 10,00,000
The loan from Mr. A a/c 5,00,000
Salary  a/c 2,00,000
Wages a/c 1,00,000
Purchases a/c 10,00,000
Sales  a/c 15,00,000
Suspense a/c 2,00,000
30,00,000 30,00,000

When we know the difference behind the difference we will transfer the amount of suspense account to the original related account by crediting the suspense account. For more explanation please find the topic of Error Rectification.

3. You don’t know how to classify the specific transaction: –

In some time, An data entry operator did not understand the actual business transaction, in that case, he will open a suspense account and record this transaction into it. The benefit in the recording in the suspense account is that when an accountant finalizes the books of account first all he will clear the all pending transaction in the suspense account. So if he posted it in the wrong account then there will chance of error which will be located after the audit process or if he did not record it then there is a chance of missing the voucher for the transaction.

For Example: –

Date 01/11/2018, The owner paid Rs 10,000/- to an employee along with the salary.

Solution: –

In this case, The data entry operator did not know how to treat this amount. He is confused in that, will be treated this amount as part of the salary or treated separately. So, for the time being, he records this amount in the suspense account shown as follows: –

Date  Particulars   L.F. Debit  Credit
01/11/2018 Suspense A/c Dr. 15,000
To Bank a/c 15,000
(Being the payment made to the employee but the name of the account is not clear, So, recorded in the suspense a/c)

After making the connection with an accountant or owner, he gets to know that is the amount of commission paid on the sale done by him. So, it will be transferred to the Commission on turnover account: –

Date  Particulars   L.F. Debit  Credit
01/11/2018 Commission on turnover A/c Dr. 15,000
To Suspense a/c 15,000
(Being the name of the expense account is clear. So, an amount is transferred to the original account)

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