Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Suspense Account
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- November 29, 2013 at 8:09 am #148409
Hi Sir, hope you are doing fine, First of all let me thank you very much because The Q2 Single financial statements of exam format which was giving me shivers, it was but now I am able to solve these better then ever, The key? Mini excercises of OT notes are must along with question practicing from revision kit, I did so many mistakes when attempting them first time but now those mistakes and panic level is reduced and confidence level is boosted………… Now I have 2 questions
1)May be I could sound stupid but I think I totally forgot SUSPENSE ACCOUNT!!don’t have an F3 or CAT book at the moment to revise, In your OT notes, mini excercises of sundry question 2 I can’t understand how that question is done?, can you please explain it to me and rewind my memory back to good old days of F3 by telling me little bit about how to use suspense account?
2)Regarding interpretation of ratio analysis, I remember I already learned them in last sitting in paper F5 and I am nearly OK at interpretation of those and still remebered them, how much those ratio questions are different from F7 level? surely I am gonna revise it but need to know the difference so I can reduce a little bit of panic and boost my morale and confidence
Thanks in Advance 🙂
December 1, 2013 at 11:07 am #148793Hi, dealing with your second point first – what makes you think that the calculation of ROCE will have changed since F3? Or Receivables Days? Or Current Ratio?
The calculations are the same – but at F7 level the greater importance is placed on your ability to provide explanations of matters which could have caused the change in ratio from one year to the next or from one company in comparison with another. It’s the INTERPRETATION which scores the bulk of the marks
Suspense Accounts – whenever I teach these, virtually my opening line is “These are the classic indications of an incompetent accountant” (It may not always be true, but it wakes the students up!) A suspense account is used where, having completes the year’s transaction postings, the trial balance doesn’t balance. So, open up a suspense account, put in the appropriate figure and, lo and behold, our trial balance now balances. Laughingly, we can imagine leaving the amount there and maybe increasing it as years go by or even depreciating it “Amortisation of suspense account” would be an interesting accounting policy note
To remind you how they work, say we have an issue of shares at a premium. Say 30,000 $1 equity shares issued at a premium of 30 cents each. The company will receive $39,000 (30,000 x $1.30) and that’s easy! Debit cash / bank. But where’s the credit? “I don’t know” says the Chief Financial Officer. “I’ve never had to record such an entry before”
But if we only record the debit of cash $39,000, our trial balance will not balance (Every debit has a credit and every credit has a debit) and we cannot progress towards financial statements preparation until the trial balance balances!
So, for want of anywhere else to put our credit, let’s open up a suspense account and put the credit in there.
Now our double entry is:
Debit Cash $39,000
Credit Suspense $39,000Next problem – where to put the Suspense Account balance in the financial statements. It’s a credit balance so it can ONLY be a liability or an item of income (or equity). Clearly we cannot show at the top of the Statement of Income “Revenue combined with Suspense Account Income”
And nor can we show it as a liability (it’s not “an obligation, legal or constructive, arising from some past event …….)
To get ourselves out of this hole, we need to establish what the correct double entry should have been to record the source of the $39,000 receipt of cash and, in the above example, it was the issue of 30,000 $1 equity shares at a premium of 30 cents each.
The CORRECT double entry should therefore have been:
Debit Cash $39,000
Credit share capital $30,000 (30,000 shares at $1 each)
Credit share premium $ 9,000 (30,000 premiums of 30 cents)Now we have determined what we HAVE done and also what we SHOULD HAVE done. How do we get from one to the other? Two ways of resolving it. Either completely undo the wrong recording – so Debit Suspense Account $39,000 and Credit Cash $39,000, followed by the correct entry:-
Debit Cash $39,000
Credit share capital $30,000 (30,000 shares at $1 each)
Credit share premium $ 9,000 (30,000 premiums of 30 cents)Or alternatively, look at the entries of what we HAVE done compared with what we SHOULD HAVE done. The Debit Cash $39,000 is fine, so no need to touch that. But we need to undo the credit entry in suspense and put the appropriate figures in share capital and share premium.
So alternative approach number 2 would be:
Debit Suspense $39,000
Credit share capital $30,000 (30,000 shares at $1 each)
Credit share premium $ 9,000 (30,000 premiums of 30 cents)All clear?
December 1, 2013 at 11:53 am #148797Thank you so much Sir, I finally understood and also now able to calculate the answer of this question, however as you said that this can be a sign of an incompetent accountant, I marked your words and thank you again for waking me up, when I was studying F1, My professor always told me one rule, Rule #1 your boss/leader/teacher is always right, Rule #2 If your boss/leader/teacher is wrong NO! go back to rule No.1 that boss is always right, you are my boss, teacher, leader and also a legend, (Seriously), I Promise you that I will Improve myself and be a better accountant, thank you for your advice, i’ll take this to my heart……. and as regard as ratio analysis, when I was studying F5, I not only learned them but understood them and was very well in interpreting them, so I hope I will not be having any difficulty with it in F7 🙂
December 1, 2013 at 12:04 pm #148799You’re welcome
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