Understanding Suspense Account: Uses and Salient Points

June 10th, 2006 Comments off
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USES OF SUSPENSE ACCOUNT

Suspense account can be used for the following valid reasons :

1.   It’s an account for bookkeeper to use which can be posted any difference on the trial balance pending the discovery of errors; the errors when found are corrected by debiting and crediting the suspense account. Ultimately, the suspense account is nil balance after the proper transfer to the correct accounts.

 

2.   It’s an account to which one side of the double entry recording a transaction can be posted until its correct destination is known. This one side can be a debit or a credit entry.

Say for example, that a bookkeeper saw a bank receipt of $10,000 in the company’s bank statement, but due to insufficient information, he does not know whether this money is from a customer who is paying up its outstanding account or it’s the receipt for the sale of its fixed assets. Hence, the bookkeeper can temporarily post this transaction into a suspense account until he can discover the true nature of the transaction.

Illustrated in terms of double entry which is as follows:

Debit : Bank account 10,000  Credit: Suspense account  10,000

( Being the initial creation of a suspense account to accommodate this unidentifiable item)

Subsequently, the next step is to reverse this suspense account:

Debit: Suspense Account  10,000  Credit: Customer A’s account  10,000

( Being clearance of suspense account and transfer to the proper account)

3.It’s an account to defer expenses when part of the benefit of the current expenditure will not be  received until a subsequent period

Illustration No 1:

      Say, in October , Company A made a payment in advance of $12,000 for its annual dinner which should be officially conducted in Dec’06. Instead of expensing it immediately, the company can suspense/defer it temporarily and then expense it off in the correct month of Dec’06

      Illustration No.2: 

      Another example, might be a company paid $24,000 to its supplier for deferred advertisement which is meant for twelve advertisement during the year. Hence, it can temporarily suspense this $24,000 and monthly expense off from this suspense account the expired benefit.

 

SALIENT POINTS TO NOTE

·      Suspense accounts must be minimized, in the case of item 1& 2 ( above uses),  the clearance of the suspense account must be done to add credibility to the financial statement.

·      The longer the clearance of suspense accounts means that there might be items of revenue expenditure which should be charged to the Income Statement which have not been done. Suspense account can then become a time-bomb

·      Important to note that accounting fraud can be perpetuated by consistently suspending certain material revenue expenditure

 

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Financial Accounting

 
 

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