After preparing the trial balance at the end of the accounting period, it is found that the sum of both sides of the trial balance is not equal, it is assumed that there is one or more errors in the accounting entries. In this case, opening a suspense account and temporarily equalizing the trial balance. Later, before preparing the final accounts, all the records in the accounts book should be examined to find out the reason for the discrepancy in the trial balance.
Under the double-entry method, transactions are accounted by determining debits and credits. That is why the debit balance and credit balance of the trial balance must match. If there is a mistake somewhere in the calculation, there is a difference in the balance. Errors cannot be detected by verifying the authenticity of transactions within a short period of time. It is also not immediately possible to ascertain in which sector the error occurred. Accounts which cannot be ascertained are called suspense accounts. It can be said that the transactions which cannot be entered in the correct books of account due to lack of necessary information are temporarily recorded as the transactions are called as suspense accounts.
Example:- A company has deposited $5,000 in its bank account. Information missing about, who deposited the money for what purpose. In this case, $5,000 is placed in a suspense account until the necessary information is received.
Requirement of Preparation of Suspense Account
When it is not possible to equalize the balance on both sides of the trial balance due to errors in the books of account, to equalize the balance on both sides of the trial balance by temporarily opening a suspense account. This is one of the reasons for creating a suspense account. If the sum of the debit side of the trial balance is less, the entry is made in the debit side of the suspense account and if the sum of the credit side is less, the entry is made in the credit side of the suspense account.
1. Completion of Trial Balance: Errors may occur in various cases while entering transactions. Due to these errors, the trial balance will not match. It is not possible to search for errors even in a short period of time. The trial balance is completed by making an entry in the Suspense Account by the amount in which the discrepancy has occurred.
2. Final Account Preparation: Final account preparation is not possible if the trial balance is not reconciled. No matter what the error is, the organization has to prepare the final account within a certain period. Suspense account is opened for the purpose of preparation of final accounts and financial statements within a specified time line.
3. Basis of Inquiry: One of the reasons for maintaining suspense accounts is that it is used as a basis for subsequent inquiry into errors. In the case of keeping accounts, the amount of money that has been falsified is written in the suspense account. It is being investigated where the money came from.
4. Accelerating Accounting: Suspense accounts are opened to ensure that the pace of preparation of financial statements and other reports is not slowed down due to discrepancies.
More Resources
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