What is suspense account?


The suspense account

When the trial balance totals fail to agree, it is possible that the difference between the credit and debit totals is due not to a single error but to a combination of errors.  The process of locating errors may take a long time and it may be necessary in the meantime to proceed with the preparation of the financial statements.  In such a case, the difference in the trial balance totals could temporarily be placed in a suspense account.  The main purpose of this account is to "hold in suspense" the error or errors until discovered.
If a suspense account is not cleared until annual financial statements are finalised, it must be carried over as a balancing item.  It was suggested also at times that such a suspense balance could be treated either as a revenue or expense item, if the amount involved is immaterial.  The deficiency of this approach is that a seemingly immaterial suspense balance could be a result of compounded material errors whose net effect is a small value.  For example, an understatement of sales by shs. 1,000,000 and an overstatement of purchase returns by shs. 1,000,010 would produce a net difference of shs. 10.  Although a small figure, it is a product of much larger values.  For this reason all trial balance differences must be investigated and cleared.

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