We use a suspense account to correct accounting errors. This is true if the error has one side effect. Or one side of a double-entry principle was affected. In addition, the error may affect the trial balance’s balance due to wrong addition, etc. In this article, let’s explain how to post into this account to correct errors.
What’s a suspense account?
It is an account where the difference in the trial balance is recorded temporarily until it is corrected. I have written a separate article that defines and explains this account. Read more.
How does it work?
If a trial balance has differences, a suspense account will be created. This will help the trial balance to have the same total amount until the errors are detected and corrected. Next, a suspense account will be created. The screenshots below explain it all.
This screenshot from Google Sheet reveals that at the end of May 2020, the trial balance didn’t have the same total at the bottom line. The debit side shows NGN 6,528,000 and the credit side shows NGN 6,814,400.
To balance it up, the debit side will include the amount that will make it equal to the credit. Why? It is the debit side that has a smaller amount. You can see the adjustment in the next screenshot below.
You will notice that the trial balance includes a suspense account on the debit side. Also, the two sides have the same totals. This is due to the use of suspense a/c. Next, a separate suspense account will be opened. As you can see in the above screenshot. The difference will be kept in this account temporarily. This will give the entity’s accountant time to investigate the course of the discrepancy.
After finding the errors, it will be corrected in the suspense account as one entry and the account where the error was discovered as another entry to complete the double entry. For example, assuming upon investigation. The accountant found out that the cause of the error was because a credit purchase of 286,400 was posted to the debtor’s a/c but omitted from the purchases a/c.
To correct the error, we debiting the purchase account and crediting the suspense account. You will notice from the above screenshot that the suspense a/c is nil off. With no pending balance. Note that not all errors discovered will affect the trial balance. The next article under financial accounting explained it.
In summary, accountants used a suspense account to correct certain accounting errors. It helps the trial balance have the same totals on the debit and credit sides. Temporarily, the difference remains in the a/c till the errors are discovered and corrected.