14 Suspense Account

Learning Objectives 

• To understand the meaning, usage, and significance of Suspense Account 

• To realize how errors affect the financial statements of the next years 

• To be familiar with the usage of Profit and Loss Adjustment Account to rectify the errors 

Need for Suspense Account

• Errors affect the agreement of Trial Balance. 

• This results in delayed preparation of Final Accounts. 

• To avoid this time delay, the difference in trial balance is kept in an account called 'Suspense Account'.

Suspense Account 

• If the debit side of trial balance exceeds the credit side, then difference is put on the credit side & suspense account shows a credit balance and on the other hand for the credit side of trial balance i.e., as vice versa. 

• When all errors affecting the Trial Balance are located, Suspense Account stands closed. 

• Debit Balance in Suspense Account will be taken to the Assets Side of the Balance Sheet and for Credit Balance as vice versa.

• This rectification entries will make existing suspense a/c which appears on Trial balance to be stands closed before preparation of final accounts. So suspense account will disappear in trial balance after update of this rectification entries. Therefore suspense a/c never appears on final accounts. 

Rectification of Error on the financial year 

Note 

• Ledger Postings can be prepared for Suspense Account as usual with the difference figure brought forward either on the debit side or credit side as opening balance of next year (If we didn't found the rectifications in the current year).

Profit and Loss Adjustment Account 

• While preparing final accounts nominal accounts are closed by transfer to either Trading Account or Profit and Loss Account.

• The real accounts and personal accounts are carried forward to the next trading period. 

• Suspense Account appearing in the Balance Sheet will also be carried forward to the next trading period.

• To rectify errors in such situations, Profit and Loss Adjustment Account is used. 

• It will be closed by transfer to Capital Account. 

Need:- 

• Errors rectified in the next or subsequent trading period should not affect the profit or loss of the next trading period.

Rectification of errors by use of Profit and Loss Adjustment Account:

Entertainment expenses Rs.95, though correctly entered in cash book were omitted to be posted in the ledger. 

Rectification of Error on the next financial year