Suspense Accounts
In previous chapter, you learned about the errors which do not
have any impact upon the agreement of trial balance.
In this chapter, you will learn about the errors which do have
effect upon the agreement of trial balance.
Suspense:
You must have gone through the word suspense , in your life,
several times, at different occasions.
It might be used when to describe an uncertain outcome of the
event.
Whereas, in the world of physics, it describes the theory of
maintaing balance.
For now, in accounts you will learn suspense account for the
purpose of passing entries for those errors, which does have an
effect upon the agreement of trial balance.
Suspense Account:
Suspense account is opened, whenever, the 2 columns of trial
balance do not agree.
Follow this illustration.
D7
you can notice in the exhibit, that the credit column of trial
balance falls $1000 short, thus, a suspense account will be
opened immediately to maintain the temporary balance , until
the error is identified ( as shown below )
D8
[remember]
If the difference error in the trial balance is not found before
the end of accounting year, the suspense account balance is
then recorded in the Balance Sheet.
If the difference is recorded in credit side of suspense account,
then the suspense account balance will be included in the
capital & liabilities section of the Balance Sheet, else, Asset
section.
Correction of Error
One purpose of identifying error is to check whether it requires
any adjustment to the Net Profit in the Trading and Profit And
Loss Account.
Once the error is identified, corrective Entries into relevant
accounts will be passed.
Beside learning from passing corrective entries ( to agree
balance in trial balance) into suspense account, you must side
by side also learn which errors have impact upon Net Profit and
not.
The errors will be of two nature:
· ones having effect upon the Net Profit.
· ones having no effect upon the Net Profit.
Remember
Adjustment to the Net Profit will be always required when
errors are found in accounts which appear in the Trading And
Profit And Loss Account.
Errors effecting Profit and loss account
Carrying on the example above, assume that error is identified
and that the credit purchase of motorvan,$1000, from creditor
was entered into Motor Van account but not into creditors
account.
Correction: Dr Suspense account
Cr Motorvan account
d@10
and the suspense account would be thus closed.
Did you notice?
Both these accounts, Motor Van and the Creditor's account
appear in the Balance Sheet which is why did not have any
affect upon the Net Profit.
Errors effecting Profit and Loss Account:
Carrying on the above example, assume that the error is found
and that the sales account was undercasted by $1000.
Correction: Dr Suspense Account
Cr Sales Account
D@9
and the suspense account would be thus closed.
Did you notice?
The sales account, which was undercasted, directly appears in
the trading and profit and loss account, and so Net Profit would
be now adjusted.
Impact on Net Profit.
Assuming that the Net Profit of Best Ltd was $2600. Sales
should have been increased by $1000, which in turn will have
increased the Net Profit.
Below is the statement of Corrected Net Profit
D@11
Now we will try with the example of several erros to
consolidate the concept in this area.
Carrying the example above, assume that the following arrors
are discovered:
A. Sales undercasted by $500
B. Rent income account undercasted by $1790
C. Cash recieved from creditor, $1290 entered into Cash
Account only.
D. A sale of $69, recorded into Sales account and Debtors
account as $59
Note: Error A, B, D directly affect Net Profit
Error C only consist of accounts appearing in Balance Sheet.
Error D is an example of Transposition error and wont be passed through the
Suspense Account ( since suspense account only consist of 'Errors Affecting
Trial Balance'
D@12
VERY IMPORTANT
Many students find themselves at ease in detecting which
errors will require an adjustment to the Net Profit, but they face
problem in deciding whether adjustment requires Net Profit to
be Increased or Decreased.
Here we have a Logic to make life of such students easier.
Always remember this rule that If Sales will increase as a result
of adjustment, Net Profit must be increased and if adjustments
will require (i) cost of goods sold ie (Purchases; Opening Stock,
etc) or (ii) expenses to be increased, the Net Profit must be
decreased.
Highlights:
1. Errors which do not have affect profit will only require
adjustment to accounts appearing in Balance Sheet.
2. Errors found in accounts appearing in Trading and profit and
loss account will affect Net Profit.
3. Suspense Account is only opened to show the difference in
Trial Balance
4. Errors not affecting Trial Balance do not require suspense
account to be created and are instead corrected by passing
journal entries ( as taught in previous chapter)
