## **Learning Outcomes**

After reading this article, you will be able to explain why suspense accounts are created, identify various types of bookkeeping errors, describe the steps for correcting errors and clearing suspense accounts, and prepare correcting journal entries in line with ACCA FA2 requirements.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand the function and treatment of errors and suspense accounts in double-entry bookkeeping. This article focuses on:

- The purpose of a suspense account in bookkeeping
- Types of errors detected and not detected by the trial balance
- How to correct errors and clear suspense accounts
- Preparing correcting journal entries in the general ledger
- The effect of corrections on the trial balance and financial statements

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. A trial balance fails to agree, showing a difference of \$500. What is the correct use of a suspense account in this situation?
2. Which of the following errors will NOT be revealed by extracting a trial balance?
   a) Posting only one side of a transaction  
   b) Entering the same amount on both sides of the wrong accounts  
   c) Arithmetical errors in account balances  
   d) Omitting a debit entry
3. True or false? Posting an entry to a suspense account is a permanent solution to an unbalanced trial balance.
4. Briefly state the steps involved in clearing a suspense account after discovering the correct posting for a transaction.

## **Introduction**

Accurate double-entry bookkeeping requires that every transaction is recorded as equal debits and credits. Despite controls, errors can still occur—some are revealed when the trial balance fails to balance, others may pass undetected. When an unexplained difference exists, the suspense account acts as a temporary holding place, allowing work to proceed while the error is investigated.

This article explains when and how to use a suspense account, outlines common types of errors, and details procedures for correcting errors and eliminating the suspense account entry before preparing final financial statements.

> **Key Term: suspense account**
> A temporary general ledger account created to hold an unexplained balance, usually when the trial balance does not balance, until the root error is found and corrected.
>
> **Key Term: trial balance**
> A listing of all general ledger account balances at a point in time, with total debits and credits checked for equality.

## **Purpose of the Suspense Account**

Whenever the sum of debit balances does not equal the sum of credit balances in a trial balance, the suspense account is opened for the difference. Its purpose is to ensure the double-entry system remains intact and enables the accountant to continue producing working draft accounts until all errors are investigated and corrected.

The suspense account does not appear in the final financial statements and must be cleared once errors have been identified.

### When to Create a Suspense Account

- Recognising only one side of a transaction in the ledger
- Unequal totals from mathematical errors
- Unidentified receipts or payments until their nature is clarified

### Posting to the Suspense Account

If the trial balance shows excess debits, the balance is posted to the credit side of the suspense account and vice versa. Every subsequent correction that affects the trial balance will clear a corresponding amount from the suspense account.

## **Types of Bookkeeping Errors**

Errors detected (and not detected) by the trial balance are grouped as follows:

### Errors Revealed by the Trial Balance

These will cause an imbalance and require the use of a suspense account:

- Partial omission: only debit or only credit recorded
- Unequal debit and credit amounts posted for the same transaction
- Mathematical addition errors in account balances
- Incorrectly computed ledger balances

### Errors Not Revealed by the Trial Balance

These do not require—nor are corrected by—the suspense account, as the trial balance will still agree:

- Complete omission: both debit and credit left out
- Errors of commission: correct amount, wrong account of same type
- Errors of principle: correct amount, wrong account type (e.g., asset instead of expense)
- Compensating errors: two errors cancel each other's effect
- Original entry errors: both sides recorded using the wrong amount
- Complete reversal: debit instead of credit, and vice versa

> **Key Term: error of omission**
> A transaction is entirely absent from the accounting records—both sides have been left out.
>
> **Key Term: error of commission**
> A correct amount posted into the wrong account of the same type (e.g., one expense account instead of a different expense account).
>
> **Key Term: error of principle**
> A transaction classified in the wrong type of account (e.g., posted as an asset instead of an expense).

## **Correcting Errors and Clearing Suspense Accounts**

To resolve suspense account balances, each error must be identified and rectified through suitable journal entries. Only corrections relating to errors affecting the trial balance will involve the suspense account.

### Steps for Correcting Errors

1. Determine what was posted (wrong entry).
2. Determine what should have been posted (right entry).
3. Post an adjusting journal entry to correct the error and, if needed, clear the suspense account.

### Clearing the Suspense Account

Once all errors have been corrected, the suspense account should show a nil balance. If not, further investigation is needed before final accounts are prepared.

### **Worked Example 1.1**

A supplier invoice of \$1,200 for new equipment was posted:  
Debit: Purchases \$1,200  
Credit: Payables \$1,200

Later, it was discovered that this should have increased the equipment (non-current asset) account, not purchases. What entries are needed to correct this?

> **Answer:**  
> The purchases account was increased instead of equipment. To correct:  
> Debit: Equipment \$1,200  
> Credit: Purchases \$1,200
>
> No effect on the suspense account, as both entries were made—just in the wrong account.

### **Worked Example 1.2**

A cash payment of \$450 to a supplier was recorded only on the credit side of cash at bank. At trial balance, a \$450 debit difference remains and is posted to the suspense account. How do you correct this?

> **Answer:**  
> The payment was not posted to the supplier (payables) account. Correction:  
> Debit: Payables \$450  
> Credit: Suspense account \$450
>
> This clears the suspense account.

### **Worked Example 1.3**

A banked cheque from a customer for \$200 was not recorded at all. How does this error show up in the trial balance? What correction is required?

> **Answer:**  
> The trial balance will balance, as both sides (cash and receivables) are omitted. Correction:  
> Debit: Cash at bank \$200  
> Credit: Receivables \$200
>
> No effect on the suspense account in this case.

### **Exam Warning**

If the suspense account is not cleared after adjustments, check ALL accounts again—an uncleared suspense balance indicates an unresolved error or an additional error.

## **Effect of Corrections on Financial Statements**

Errors may affect only the statement of financial position (e.g., assets, liabilities), the statement of profit or loss (e.g., income, expense misstatements), or both. Ensure corrections are fully processed before financial statements are finalised.

## **Summary**

A suspense account is a temporary solution for unexplained differences in the double-entry system. Its balance must be cleared by identifying and correcting all errors. Only errors impacting the trial balance use the suspense account. Corrections are made with appropriate journal entries, restoring accurate records ahead of final statement preparation.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the purpose and temporary use of the suspense account in correcting trial balance errors
- Identify which errors create suspense account balances and which do not
- Prepare journal entries to correct both suspense-account and non-suspense-account errors
- Clear the suspense account entirely before preparing financial statements
- Understand the impact of corrections on financial statements

## **Key Terms and Concepts**

- suspense account
- trial balance
- error of omission
- error of commission
- error of principle

Suspense account and corrections - Creating and using a suspense account