This video provides a short introduction to suspense accounts, both for the use of suspense
accounts in journal entries, as well as for the use of suspense accounts in trial balance
preparation and error correction.
Suspense accounts are used during the posting of journal entries as a temporary solution
for the trade-off between timeliness and accuracy.
The timeliness principle in accounting refers to the need for accounting information to
be presented to the users in time to fulfill their decision making needs.
Whereas timely presentation of accounting information is highly desirable, it may conflict
with the objective to present reliable information.
This is because producing reliable and accurate information may take more time.
For example: if you are in charge of posting the daily journal entries for the bank statement,
then it is important to get those entries completed as soon as possible after receiving
the bank statement.
After all, cash is one of the most important accounts on the balance sheet, and an account
which in a lot of companies has a significant transaction volume.
Let’s assume the latest bank statement shows a cash outflow of 919.77.
It is important to journalize that straight away.
40.67 in telephone expenses, 801.18 in travel expenses, and 77.92 for which the nature of
the spending is as yet unknown.
If you only cared about accuracy, you would wait with posting the journal entry until
you have found what the 77.92 is related to.
But that means each line item remains unposted.
After all, a journal entry can only be posted when the sum of the debits equals the sum
of the credits!
If you care about accuracy as well as timeliness, and currently have insufficient information
to determine the appropriate account for the 77.92,
then you park the 77.92 on a suspense account.
This way, you can push the bank account journal entry through right now, and then as soon
as possible afterwards reclassify the 77.92 to office supplies once you have investigated
what the spending was for.
The risk here is that some people leave amounts in the suspense account for too long, which
makes it harder to find the correct account as time passes.
Clear out items in the suspense account on a daily basis, rather than a week, a month
or years after the transaction took place.
Suspense accounts are used in trial balance preparation to address the need for consistency
between general ledger and subledgers.
A trial balance is a list of all the general ledger accounts contained in the ledger of
a business.
This list will contain the name of each nominal ledger account and the value of that nominal
ledger balance.
In this overview, we use A through H. Each nominal ledger account will hold either a
debit balance or a credit balance.
The debit balance values will be listed in the debit column of the trial balance and
the credit value balance will be listed in the credit column.
If the total of the debit column does not equal the total value of the credit column
then this would show that there is an error in the nominal ledger accounts.
In this example, our debits on the left are bigger than our credits on the right.
This is where a suspense account comes in: you “plug” the missing amount (a credit
amount of 3) in the suspense account, in order to artificially and temporarily balance the
trial balance.
You then start the error review and correction process.
This error (or multiple errors) causing the imbalance must be found before a profit and
loss statement and a balance sheet can be produced.
Thank you for watching!
This video walked you through a short explanation of suspense accounts, I suggest you watch
a more detailed explanation next to get an even better understanding.
Here are two choices: there is a 10-minute explanation available on the left, and a 22-minute
explanation on the right.
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