Wednesday, December 24, 2008

Suspense Account

This week’s topic is fun and unlike the previous topic , very interlinked . So if you feel you are not proficient enough with you journal entries as yet , I would suggest not to touch this topic now . If you have mastered the journal entries, can identify the nature of entries, is well acquainted with ledgers and type of ledgers – you can move on , confidently !

The topic is - suspense account, (funny name ) and a short one. According to’s definition "A suspense account is an account in the general ledger in which amounts are temporarily recorded. The suspense account is used because the proper account could not be determined at the time that the transaction was recorded.
When the proper account is determined, the amount will be moved from the suspense account to the proper account."

Before I proceed with a simple example, it’s easier if I mention errors one by one and cite examples which will be much easier to comprehend. So just to refresh up our minds – I will start off with

Error of Omission: if a transaction is completely omitted from the books there will be neither a debit entry nor a credit entry, so the trial balance will balance. For example, cash purchases not entered in the books.

Error of commission: This occurs when a transaction is entered using the correct amount and on the correct side , but in the wrong account of the same class . For example, sales on credit to C J correctly credited to the sales account, but debited to M K ‘s account instead of C J's .

Error of Principle : This occurs when a transaction is entered using the correct amount and on the correct side , but in the wrong class of account , e.g. cash paid for machinery repairs correctly credited on the cash account but debited to the machinery account instead of machinery repairs account .

Compensating Error: These occur where two or more, errors cancel each other . For example if the purchase account is added up $200 too much and the sales account is also over added by the same amount, there is an extra $200 on both the debit side and the credit side , so the trial balance will balance

Error of original entry: This occurs where an incorrect figure is used when the transaction is first entered in the accounts. The double entry will be made using this incorrect amount in both accounts. e.g. if the total of an invoice is $1010 but is incorrectly entered in the accounts as $1100 , the trial balance will balance .

Complete reversal of entries: This occurs where the correct amounts have been entered in the correct accounts, but the entry has been made on the wrong side of each account. For example, Cash purchases debited in the cash account and credited in the purchases count. This is a reversal of ht correct entry, but the trial balance will balance.

The interesting part – we will not open a suspense account if the any of these above mentioned errors occur! We will correct these errors by using journal entries using each relevant account. For example, cash drawings of $300 had been completely omitted from the books. The entry would be Drawings: Debit and Cash: Credit. We would use a suspense account in these situations, for example, the sales account was under cast by $300. Sales must be credited with $300 and the suspense account debited by the same amount. This is why it is important to identify if our situation has any of those 6 errors. In that case, we will not use a suspense account.

... For now, I hope you're staying warm, wherever you are in the world, and hope your families are happy and close, and I hope you're feeling as loved and adored as appreciated as you really and truly are. ~HappY holiDaY Wishes to All ~

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