When the trial balance does not tally due to the one-sided errors in the books, an accountant puts the difference between the debit and credit side of the trial balance on the shorter side as a suspense Account. As and when an error is located it has to be rectified. After rectification, the balance in the suspense account reduces and consequently becomes zero. Thus we cannot categorize the Suspense Account as it is a temporary account and can have debit or credit balance depending upon the situation.
In summary, a suspense account is a temporary account used to rectify errors in a trial balance, and rectification is the process of correcting those errors.
Trial Balance errors can be one-sided, meaning they only affect one side of the trial balance, or they can affect the trial balance totals. For rectifying one-sided errors you have to identify the account with the error. A suspense account can be created to ascertain the difference in the trial balance and rectify the mistakes.
The rectification process essentially involves:
- Cancelling the effect of wrong debit or credit by reversing it; and
- Restoring the effect of correct debit or credit.
For this purpose, we need to analyze the error in terms of its effect on the accounts involved which may be:
(i) Short debit or credit in an account; and/or (ii) Excess debit or credit in an account.
Therefore, rectification entry can be done by:
(i) Debiting the account with short debit or with excess credit,
(ii) Crediting the account with excess debit or with short credit.
Here are some things to know about suspense accounts and rectification:
Error correction
If you find an error in an account, you can pass a journal entry through a suspense account to correct it.
A suspense account is a general ledger account where you temporarily record ambiguous transactions (you’re not sure how to classify a transaction) or there are discrepancies in a trial balance. If the debit side of the trial balance is short, then the amount is placed on the debit side of the trial balance debit Suspense account and similarly, if the credit side of the trial balance is short then that amount is placed on the credit of suspense account. The amount of money in a suspense account is called the suspense balance.
Close the suspense account: Once you’ve tracked down the error and corrected it, you can close the suspense account:
For example, you have identified a short of Rs.10000/- on the debit side of the trial balance and you are not able to categorise this amount. So you have placed Rs.10000 on the credit side of the trial balance as debit suspense. Later you found out that a table purchased for Rs.10000 was not recorded in the furniture account.
Now you will make a journal entry as follows;
Debit: Rs.10000/- furniture account
Credit: Rs.10000/- Suspense account
After passing the above entries Suspense Balance in the general account becomes nil and the debit outstanding in the furniture head increased by Rs.10000/-.
A suspense account is created after preparing a trial balance and rectification is done before closing ledger accounts.
If all errors are rectified, the suspense account will automatically close and become zero.
If there’s still a difference after all errors are rectified, the remaining balance should be transferred to the balance sheet. The mistake may be rectified after the preparation of the final accounts. In such a case, a Suspense Account is carried forward to the next accounting year. The suspense account balance can be a debit or credit, depending on the situation. If the suspense account has a debit balance, it will be recorded on the assets side of the balance sheet. If it has a credit balance, it will be recorded on the liabilities side.
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