Everything you need to know about suspense accounts
In short, a suspense account is the point of last resort when you need a short-term holding bay for financial items that will end up somewhere else once their final resting place is decided.
Keep reading to find out how you can use, reconcile and account for suspense account transactions – with examples >>>
Suspense accounts are frequently used in business, accounting, finance, investing and lending:
A suspense account is primarily used in two accounting scenarios:
At times, all the required details for a particular transaction are not available but it still needs to be recorded in order to keep the accounting books updated.
That is where the “catch-all” suspense account comes in.
The unclassified transactions temporarily “parked” in this account are a “suspense” that we need to investigate and relocate into their correct accounts accordingly.
The 2 most common reasons for holding an entry into a suspense account are:
There is an uncertainty regarding transaction classification at the time of its entry into an accounting system.
For example, when a payment is received but it is unclear who sent it, what it is for, or how to classify the transaction:
Let’s suppose you receive a payment from an unknown entity; or the sender is known but you are not sure which invoice they are paying for.
In both cases, you hold the payment in the suspense account until the matter is clarified with the payer, at which point the amount is moved to from the temporary suspense account to its appropriate final destination in the general ledger.
Deposits or withdrawals are made for transactions that are yet to be completed.
For example:
Let’s suppose you have been alerted that a remittance someone sent you from abroad is ready for withdrawal. Until you actually make the withdrawal from the agent or financial institution, the remittance money may be stored in their suspense account.
Another instance in which having a suspense account comes in handy is when a trial balance is out of balance, meaning the debit and credit columns do not match.
The suspense account can hold the difference that led to the trial balance not balancing until the discrepancy is rectified.
The suspense account can have a debit or a credit balance, depending on which side the trial balance is short.
If the credits in the trial balance exceed the debits, record the difference as a debit–and vice versa–to make both columns of the trial balance report balance.
Trial Balance & Suspense Account: Debits/Credits | |
---|---|
Trial Balance Imbalance | Suspense Account Posting |
Credit > Debit | Debit |
Credit < Debit | Credit |
There are several errors that may be revealed by the trial balance which involve the suspense account.
Trial Balance Errors Corrected via Suspense Account | ||
---|---|---|
Trial Balance Error | Error Explanation | Error Correction in Suspense Account |
Addition error | Figures are incorrectly added in a ledger account | Error corrected with a journal entry for the difference amount between the affected ledger account and the suspense account. |
Posting error | Entry made in one record is posted to another incorrectly (e.g., $19 vs. $91) or not posted at all (e.g., recording debit or credit twice; invalid account number) | |
Compensating error | Two equal and opposite errors, which need to be corrected even though the trial balance is actually balancing | |
Trial balance error | Balance is incorrectly extracted or omitted in preparing the trial balance | As the trial balance is amended directly, only a one-sided journal entry into the suspense account is needed to record the difference. |
While other trial balance errors do exist (e.g., error of omission, commission, principle, original entry, reversal of entries), they do not affect the suspense account.
Investing and brokerage suspense accounts temporarily hold investors’ funds until the money is allocated towards the purchase of new investments.
For example, if an investor who sells off securities worth $10,000 plans to promptly reinvest that money into other financial instruments, the $10,000 would be temporarily moved to a suspense account until it is reinvested.
Suspense accounts are also used by lenders, such as mortgage providers, when borrowers accidentally or intentionally break up their regular payment obligations.
For example, when a borrower falls short on a monthly mortgage loan repayment, the lender may keep the partial payment in a suspense account until the rest of the money is received, at which point the lender applies the combined balance to the correct account(s) (e.g., principal, interest, property tax, homeowner’s insurance).
Let’s suppose a company receives a cash sum of $500 but it cannot figure out who the money is from or what it is for.
Naturally, the Cash current asset account will be debited, but the other side of the journal posting could possibly go to any of the headings under the company’s chart of accounts:
For example, take a look at these four common examples of suspense account journal entries:
A customer paid $1,000 in cash without specifying which invoice the payment relates to.
Example #1: Unknown Invoice | ||
---|---|---|
Suspense Account - Journal Entry | Debit | Credit |
Step 1: Initial journal entry into Suspense Account | ||
Cash | $1,000 | |
Suspense Account | $1,000 | |
Step 2: Reversal journal to move entry out of Suspense Account and into Accounts Receivable | ||
Suspense Account | $1,000 | |
Accounts Receivable | $1,000 |
A customer paid an outstanding $1,000 invoice in two partial payments of $500.
Example #2: Partial Payment | ||
---|---|---|
Suspense Account - Journal Entry | Debit | Credit |
Step 1: Initial journal entry into Suspense Account | ||
Cash | $500 | |
Suspense Account | $500 | |
Step 2: Reversal journal to move the entry from the Suspense Account into Accounts Receivable | ||
Suspense Account | $500 | |
Accounts Receivable | $500 |
A supplier sent a Net 30 (= payable in 30 days) invoice for $1,000. The bookkeeper is unsure which department the invoice should be charged to.
Example #3: Unknown Profit/Cost Centre | ||
---|---|---|
Suspense Account - Journal Entry | Debit | Credit |
Step 1: Initial journal entry into Suspense Account | ||
Suspense Account | $1,000 | |
Accounts Payable | $1,000 | |
Step 2: Reversal journal to move entry out of Suspense Account and into Accounts Receivable | ||
Marketing Expense | $1,000 | |
Suspense Account | $1,000 |
The bookkeeper is unable to balance the company’s trial balance, with the credit column exceeding the debit side by $500.
Note: There is no credit entry needed because the suspense account is displayed at the bottom of the trial balance so that the debits equal credits and the report is in balance.
Example #4: Trial Balance Error | ||
---|---|---|
Suspense Account - Journal Entry | Debit | Credit |
Step 1: Initial journal entry into Suspense Account to correct imbalance in Trial Balance | ||
Suspense Account | $500 | |
No credit needed as Trial Balance credits are in excess | Not required | |
Step 2: Adjusting journal to move entry from Suspense Account to Office Supplies | ||
Office Supplies | $500 | |
Suspense Account | $500 |
The most important point to understand is that transactions are recorded in the suspense account only temporarily and need to be relocated to their correct permanent accounts as soon as possible.
This is because unallocated transactions get more difficult to reconcile with passing time, especially if there is insufficient documentation, and the account balance could grow uncontrollably.
Therefore, it is vital to have a process in place to clear out the suspense account on regular basis so that all of the suspense account entries are moved into their designated accounts to zero out the suspense balance.
Some jurisdictions have rules and regulations regarding suspense accounts because they are considered a control risk.
For example, according to Sarbanes-Oxley (SOX) in the United States, auditors must be periodically provided with an analysis of a company’s suspense account transactions based on criteria like product type, aging, or business justification.
Even if there is no timeline set by regulatory authorities for the clear-out process, businesses routinely carry out monthly or quarterly suspense account reconciliations.
In any case, every effort should be made to eliminate all unidentified transactions held in the suspense account by the end of the fiscal year, otherwise the annual financial statements will be inaccurate.
For efficiency purposes, it is also helpful to track and analyze the entries over time to minimize the reoccurrence of any transactions that cause frequent unnecessary postings into the suspense account.
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