Suspense Accounts

In order to trace out ambiguous entries, entities take support of Suspense Accounting. So, that it can find out the reasons and properly record the transaction. The role of this account came into play in two circumstances:

1. when the accountant is not aware of the nature of transaction. In this case, he temporary records the transaction in suspense account. Once he or she get the details, it is eliminated against the correct accounting head.
2. when trial balance is not in balance, a suspense account is created to temporary resolved the issue.

Suspense accounting problems are often asked in the exams. So, below exercised will help student in getting good grip over this topic.

Mendes started a news agency on January 1, 1997 with capital of Rs. 10,000 given to him by his grand mother. The business has grown fast and by the end of his first year of trading it has developed into a substantial general store.
You have been asked to prepare accounts for Mendes’s first year of trading He has attempted to produce a final trial balance at December 31, 1997, but could not agree it.

	Rs.	Rs.
Motor Vehicles	11,025
Leasehold premises	49.000
Fixtures & Fittings	11,250
Capital		10,000
Debtors	23,842
Creditors		17,288
Prepayments	2,576
Accruals		1,397

	Rs.	Rs.
Balance per bank statement
Cash in hand		1,480
Sales	93
Purchases		243,640
Administrative expenses	114,780
	25,767
Stock at December 31, 1997	34,845
On further investigation,	273,178	273,805

On further investigation, you discover the following:

i)
With a loan from the bank, now repaid, Mendes acquired stock costing Rs. 29,433 on
January 1, 1997. This is not included in the trial balance figure for purchases.
ii)
The amounts stated for fixed assets are after charging depreciation as follows:

Motor vehicles	25% per annum –	Straight line.
Leasehold premises	2% per annum –	Straight line.
Fixtures & fittings	10% per annum –	Straight line.

All fixed assets are depreciated on the basis of a full year’s charge in the years of
purchase and sale. The charge for depreciation has been included in administrative
expenses.
iii) During the year Mendes bought further fixtures & fittings, costing Rs.3,000, which he
had debited to administrative expenses, but on which he has not charged
depreciation. He has also disposed of a van, which had cost Rs.6,000; he had
credited the proceeds of Rs.5,000 to administrative expenses. On both cases cash
entry had been made correctly, but no entries had been made in the fixed asset
accounts.
iv) The cash book had been written up from cheque stubs and paying-in-slips only, but
the bank statement balance had been inserted in the trial balance. The following
items of reconciliation needed adjustment:
Lodgments recorded in the cash book but not credited to the bank statement at
December 31, 1997:
Rs.7,320
Cheques paid but not debited on the bank statement until after December 31, 1997:
Rs. 1,200
Bank charges of Rs. 100 appearing on the bank statement had not been recorded in
the cash book.

v) Bad debts totaling Rs.181 had been incurred during the year. This amount had
been debited to administrative expenses, but was still included in the figure for
debtors in the trial balance. A general provision of 10% of debtors is to be created
at December 31, 1997.
vi) All wages are included in administrative expenses amongst them a salary of
Rs.5,000 which Mendes paid to himself.
vii) Accruals and prepayments have been correctly incorporated in the double entry.
Required:
a) Show by means of a suspense account how the difference on the trial balance
should be cleared.
b) Prepare a trading and profit & loss account for the year ended December 31, 1997.

Solution

Mendes’s Ledger

Suspense Account

1997			1997		Rs.
Dec. 1	Difference in trial balance	627	Dec.31	Bank balance
	To debtors –			as per bank statement	1,480
	bad debtors written	181		Cash at bank (W-1)	4,640
	To stock	34,845		Purchases(against loan)	29,433
				Bank charges	100
		35,653			35,653

Working:

Balance as per bank statement Less: Amounts deposited but not credited by bank	DR. CR	1,480 7,320
		(5,840)
Add: Cheques issued but not presented	DR	1,200
Adjusted Balance as per cash book		4,640

Mendes

Trading and Profit and Loss Account

for the year ended December 31, 1997

	Rs.		Rs.
Purchases (W-1)	144,213	Sales	243,640
Gross profit c/d	134,272	Closing stock	34,845
	278,485		278.485
	Rs.		Rs.
		Gross profit b/d	134,272
Administrative exp.(W-2)	25,533
Net profit transferred to capital account	109,239	Gain on disposal of van	500
	134,772		134,772

Mendes

Balance Sheet

As at December 31, 1997

Capital & Liabilities	Rs.	Assets	Rs.
Capital	10,000	Fixed Assets (W-4)	69,475
Add: Profit for the year	109,239	Stock	34,845
	119,239	Debtors (W-5)	23,661
Less: Drawings	5,000	Less: Provision for doubtful debts	2,366
	114,239		21,295
	17,288	Prepayments	2,576
Accruals	1,397	Cash at bank (W-6)	4,640
		Cash in hand	93
	132,924		132,924

Workings:	Rs.
W-1 Purchases
As per trial balance	114,780
Add: Purchases made out of bank loan	29,433
	144,213
W-2 Administrative expenses
As per trial balance	25,767 (3,000)
Less: Fixtures & fittings wrongly included in Admin. Exp.	(3,000)
Salary of Mendes – drawings	(5.000)
	17,767

	proceeds of van wrongly credited to	5,000
	Add: Sale Bank charges	100
	Depreciation on Rs. 3,000 @ 10%	300
	Provision for doubtful debts
	(Rs.23,842 – 181) X 10%	2,366
		25,533
W-3	Gain on disposal of van
	Cost as given	6,000
	Less: Depreciation for 1997 @ 25%	1,500
	Book value	4,500
	Less: Sale proceeds	5,000
	Gain on disposal	(500)
W-4	Fixed Assets
	Motor Vehicles	11,025
	Leasehold premises	49,000
	Fixtures & fittings	11,250
		71,275
	Add: Fixtures wrongly included in admin. expenses	3000
		74,275
	Book value of van disposed of (W-3)	(4,500)
	Less: Depreciation on above fixtures	(300)
		69,475
W-5	Debtors As per trial balance Less: Written off	23,842 (181)
		23,661
W-6	Cash at bank As per W-1 of part (a)	4,740
	Less: Bank charges	(100)
		4,640