Everything you need to know about suspense accounts

Definition: What Is a Suspense Account?

Suspense account is a holding account used in accounting and finance to temporarily record financial transactions until they are transferred to their designated destination, including entries that are unclassified, unallocated, doubtful, disputed, erroneous, in-transit or in-progress.

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 >>>

Usage: What Are Suspense Accounts Used For?

Suspense accounts are frequently used in business, accounting, finance, investing and lending:

Suspense Accounts in Accounting

In accounting, suspense account is a general ledger account where ambiguous transactions are temporarily recorded when an appropriate classification cannot be determined at the time of initial accounting entry or trial balance reconciliation, pending transfer once the correct account is identified.

A suspense account is primarily used in two accounting scenarios:

  • 1. Uncertainty about how to classify an accounting system entry
  • 2. Discrepancies in a trial balance

1. Journal Posting

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:

A. Transaction Classification

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:

  • Payer: Who sent the payment?
  • Invoice: What is the (partial) payment for?
  • Cost/Profit Centre: What cost or profit centre should the transaction be allocated to?
  • Classification: Which account should be used to post the entry into the general ledger?

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.

B. Transaction In-Progress or In-Transit

Deposits or withdrawals are made for transactions that are yet to be completed.

For example:

  • Money has been transferred to a bank but not yet deposited into an account
  • Money is received before a policy or contract is written
  • Legal dispute

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.

2. Trial Balance

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.

Debit or Credit?

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
Trial Balance Errors

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 Suspense Accounts

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.

Lending Suspense Account

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).

4 Examples: Suspense Account Journal Entries

A journal entry to a suspense account can be either a debit or a credit, classified as any general ledger account type–asset, liability, revenue or expense¬–located under any one heading of an organization’s chart of accounts, depending on the purpose of the balancing entry posting.

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:

  • Asset: sale or collection of an asset
  • Liability: deposit for work to be done in the future
  • Revenue: work already done in the past but not yet invoiced
  • Expense: refund of a previous expense

For example, take a look at these four common examples of suspense account journal entries:

Example #1: Unknown Invoice

A customer paid $1,000 in cash without specifying which invoice the payment relates to.

  • Step 1: Initially, the bookkeeper recorded the payment in a suspense account, pending further investigation.
  • Step 2: The bookkeeper contacts the customer, identifies the invoice against which the payment was made, and shifts the cash out of the suspense account into the designated account, which is Accounts Receivable.
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

Example #2 – Partial Payment

A customer paid an outstanding $1,000 invoice in two partial payments of $500.

  • Step 1: The bookkeeper places the first partial payment of $500 into a suspense account.
  • Step 2: When the remaining $500 is received, the bookkeeper moves the cash from the suspense account to Accounts Receivable.
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

Example #3 – Unknown Profit/Cost Centre

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.

  • Step 1: The bookkeeper posts the $1,000 into a suspense account and Accounts Payable to make sure the invoice is paid in 30 days; and contacts the relevant departments to find out which profit/cost centre the invoice belongs to.
  • Step 2: As soon as it is confirmed that the invoice should be charged to the marketing department, the bookkeeper removes the expense from the suspense account and transfers it to the correct account.
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

Example #4 – Trial Balance

The bookkeeper is unable to balance the company’s trial balance, with the credit column exceeding the debit side by $500.

  • Step 1: The bookkeeper posts a $500 debit journal to the suspense account because the trial balance is short on the debit side.

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.

  • Step 2: The bookkeeper finds a posting error in the Office Supplies account, where one item was entered at $389 instead of $889. The bookkeeper corrects the general ledger by making a reversing entry in the suspense account and an adjusting entry in the Office Supplies account.
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

Reconciliation: How to Reconcile Suspense Accounts?

As the balance of a suspense account indicates control risk, the account is periodically reconciled by systematically analyzing the individual transactions to transfer them timely into their respective designated accounts and achieve a zero suspense balance at the end of each reporting period.

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.

Rules: Are Suspense Accounts Regulated?

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.

Frequency: How Often Should Suspense Accounts be Reconciled?

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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