A suspense account is an account opened as a temporary measure only to reconcile a Trial balance.
Sometimes, in spite of the best efforts of an accountant, all the errors may be located and the trial balance may not tally.
In such a situation, to avoid the delay in the preparation of Final accounts, the difference in the trial balance is placed to a newly opened account known as “suspense account” and trial balance is made to agree.
If the debit side of the trial balance exceeds the credit side, the difference will be put on the credit side of the suspense account and if the credit side of the trial balance exceeds the debit side, suspense account will be debited.
After including the balance of suspense account in the trial balance, it will appear to have tallied. This is done to avoid the delay in the preparation of Final accounts.
If the final accounts are prepared immediately without locating the errors the suspense account will be shown on the liability side of the balance sheet if it shows a credit balance and on the asset side of the balance sheet if it shows a debit balance.
The utility of Suspense Account:
Following are the utilities of suspense account:
I) Suspense account facilitates the completion of the trial balance.
II) Suspense account facilitates passing of rectification entries, and
III) Suspense account enables timely preparation of Final accounts.
Disposal of Suspense Account:
A suspense account is an account opened as a temporary measure only to reconcile a trial balance.
Later, as and when the errors are located, rectification entries will be passed with the help of the suspense account.
It may be mentioned here that all the errors may not be rectified through the suspense account.
Rectification entries are passed with the help of suspense account. Thus when all the errors are located and rectified, the suspense account will automatically stand closed i.e. it will not show any balance.
But suspense account still shows a balance, it will indicate that certain errors are still to be discovered and rectified.
In such cases, if the suspense account shows a debit balance, it is taken to the balance sheet on the assets side and on the contrary, if it shows a credit balance it is taken to the balance sheet on the liabilities side till such errors located and rectified.
Following points should be noted while passing rectification entries with the help of suspense account:
A) A suspense account is used to rectify only those errors which affect the agreement of the trial balance.
II) Errors which do not affect the agreement of the trial balance will not be rectified through the suspense account.
Rectification of errors is a process through which the errors or mistakes committed while writing the books of accounts are connected.
It should be kept in mind that the error should never be corrected by overwriting or erasing because it reduces the authenticity of accounting records and gives the impression that something is being concealed.
Different types of Rectification of errors:
From the rectification point of view, all errors can be classified into the following two categories:
A) Rectification of errors which do not affect the trial balance.
B) Rectification of error affecting trial balance.
A) Rectification of errors which do not affect the trial balance: These errors are committed in two or more accounts simultaneously, as a result, the total of both debit and credit remains the same.
B) Rectification of errors Affecting the trial balance: Errors affecting the trial balance is also termed as one-sided errors. One-sided errors are those errors which affect only one account.