Angie In: Category - Accounting in Corporates What is a profit and loss suspense account? profit and losssuspense account Share Facebook 1 Answer Voted Recent Aastha 2020-08-25T23:21:48+05:30Added an answer on August 25, 2020 at 11:21 pm This answer was edited. Profit and Loss Suspense Account An entity prepares a profit and loss suspense account when either the partner is retired or in case of the death of a partner at any time before the end of the reporting period. It is used to record some fictitious profits during the year. Why do we Prepare the Profit and Loss Suspense Account Generally, an organization prepares its financial statements at the end of its reporting period. The financial statements of typically a partnership firm include – Trading and Profit and Loss Account or Income and Expenditure account Balance Sheet. As stated above since these financial statements are prepared at the end of an accounting period. The partner may die or decide to retire on any given date. In case if the partner retires or dies in the middle of the year or on any given date then it shall be a tedious task for an entity to distribute the profits. Hence to eliminate the hardships, the “Profit and Loss Suspense Account” is created and the share of profit of such deceased or the retired partner is calculated through Profit and Loss Suspense Account. For Example, Mr Alex, Ms Anna and Mr John are in partnership sharing profits and losses in the ratio of 2:2:1. Mr Alex died on 15th April, XXXX. The firm closes its books of account on 31st December every year. So the executor of Mr Alex is entitled to 3 and 1/2 months profit. Ms Anna and Mr John decided to pay the profit immediately to the executor of Mr Alex. The profit of the previous accounting period was 1,20,000. Here, The proportionate profit for 3 and 1/2 months = 1,20,000 x 3.5months/12months = 35,000 Mr Alex’s share of profit = 35,000 x 2/5 (his share in the partnership) = 14,000 (for 3 and 1/2 months) The above calculation shall be journalised as – Extract of Balance Sheet as on 15th April XXXX: Aastha. 0 Reply Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Leave an answerCancel replyYou must login to add an answer. Username or email* Password* Captcha* Click on image to update the captcha. Remember Me! Forgot Password?