Let's illustrate why any or all four of these sections of the chart of accounts might contain a suspense account. Assume that a company receives cash of $500 but is not able to determine the reason for the receipt. Because of double-entry accounting or bookkeeping, the company's asset account Cash is debited for $500 and there needs to be at least one other account credited and the total of the credits must be $500. Without knowing exactly the nature of the $500 receipt, the best location of a suspense account could be any of the following:
- The unknown credit might involve an asset account if the cash was from the sale of another asset or the collection of an asset. In this example, the best suspense account location would be in the asset section.
- The unknown credit could involve a liability account if the cash was a deposit for future work to be done. Given these facts, the best suspense account location is the liability section.
- The unknown credit might involve a revenue account if the cash was received for work that was recently earned, but not yet billed. In this situation the best suspense account location would be the revenue section.
- The unknown credit might involve an expense account if the cash was received as a refund of an earlier expense. In this case the best suspense account location is the expense section of the chart of accounts.
Unfortunately the best location is not known at the time of the receipt, and it is hard to say where you will find the suspense account in your own general ledger.
Be aware that if the unknown account is a revenue or expense account and the amount is reported in a suspense account in your current liability section of the balance sheet, your company's net income is incorrect and all of the financial statements are incorrect. If the amount is insignificant, the problem is very small. If the amount is significant, you should find out the proper account before issuing the financial statements.
Studies show that exam questions are a great way to learn and retain important information. Gain access to our 1,700 accounting exam questions (and answers) when you upgrade to PRO.