What Is a Suspense Account? How It Works, Types, and Examples

By utilizing a suspense account, these adjustment entries can be captured and subsequently allocated to their respective accounts, ensuring the accuracy of financial statements. They also contribute to the overall transparency of accounting processes by allowing for proper investigation and reconciliation of problematic items. Without suspense accounts, the risk of inaccuracies or omissions in financial statements would be significantly higher, potentially leading to adverse consequences for businesses and stakeholders. A trial balance is the closing balance of an account that we calculate at the end of the accounting period. When the two sides of the trial balance don’t match, we hold the difference in a suspense account until we correct it. If the debits in the trial balance are larger than credits, we record the difference as a credit.

The necessary adjustments are typically made through journal entries that move the amounts from the suspense account to the correct accounts. The purpose of a suspense account is to temporarily store transactions that cannot be immediately classified into a specific account due to incomplete information or uncertainty. This accounting practice helps in maintaining the accuracy of financial statements while additional information is gathered.

• Eventually, you allocate entries in the suspense account to a permanent account.
• Well-trained personnel are more likely to accurately record and classify financial transactions, identify potential errors or discrepancies, and follow proper reconciliation procedures.
• The role of suspense accounts in maintaining accurate financial records and facilitating smooth audits cannot be overstated.
• When a transaction occurs and it’s not immediately clear where it should be recorded, it goes into this mystery box until more information is available to properly classify it.
• It is possible to also have a liability suspense account, to contain accounts payable whose disposition is still being decided.

Resolving transactions

If payments don’t cover all dues or lack allocation details, they are placed in suspense until resolved. This ensures payments are applied correctly, preventing potential servicing errors. A suspense account is a temporary account used in the general ledger to hold transactions that require further investigation to determine their proper classification. It is not specific to any one type of balance and can contain both debits and credits depending on the nature of the transactions it holds.

• A suspense account on a balance sheet is a temporary holding place for transactions that are unclear or not ready to be classified into a definitive account.
• Accordingly irrespective of the issue resulting in the suspense account posting, at the end of the accounting period the account balance reduces to zero with correcting journal entries.
• In another scenario, a customer might make a payment but fail to specify which of several outstanding invoices they intended to pay off with those funds.
• Leaving transactions in suspense can raise eyebrows during audits (and no one wants an auditor with raised eyebrows).
• To close the suspense account, credit the suspense account and debit the supplies account for the purchasing department.

When the trial balance does not tally due to unknown discrepancies, a suspense account is used to balance the books temporarily. For instance, at ABS, a discrepancy of $500 was discovered between credits and debits. While the accounting team reviewed transactions to identify errors or unaccounted items, they temporarily opened a suspense account to balance the books and ensure the accuracy of their financial reporting. The role of suspense accounts in maintaining accurate financial records and facilitating smooth audits cannot be overstated.

These errors can result in incorrect or incomplete journal entries that do not align with the intended account classification. A suspense account can be used to hold such entries until the error can be identified and rectified. They provide a means for temporarily storing these transactions until their nature is identified or discrepancies are cleared.

Identifying Suspense Accounts

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. He will move the amount from the Suspense account to the appropriate account as soon as he gets more information about the nature of the transaction.

Rectifying the Errors

Use a suspense account when you buy a fixed asset on a payment plan but do not receive it until you fully pay it off. After you make the final payment and receive the item, close the suspense account and open a separate asset account. Let us understand how suspense account entries work and how it helps accounting teams with the help of a couple of examples.

Payments

The brokerage suspense account is essential for managing the fluid nature of investments and transactions. It provides a buffer that safeguards both the investor’s assets and the brokerage firm’s integrity until the proper allocations can be made. A suspense account is a component of a company’s financial accounts that is used to record confusing entries that require additional examination to determine their right classification. Depending on the context, “suspense account” might mean a number of different things. In simple terms, a suspense account is a bookkeeping account wherein transactions are recorded before being assigned to the right category.

Establishing Robust Systems and Processes

These are considered a critical tool for maintaining accurate and organized financial records in your business. Similarly, during trial balances, any discrepancies or errors can be placed here until they’re resolved. This practice keeps your books organized and makes audits and reconciliations much smoother, acting as a safety net for your accounting system.

The Dos and Don’ts of Using a Suspense Account

A company receives a payment paid into their bank account, but the transaction doesn’t have any reference details to be able to identify what the payment is for. A general ledger is often the part of your financial records where your assets and liabilities are recorded on an ongoing basis. Suspense accounts are often used for assets or liabilities and may require further clarification to be adjusted or added where they belong. A great example of a suspense account entry would have to what is suspense account be during the process of rectifying errors. If a discrepancy is found, the amount in question may be moved to a suspense account until the source of the error is identified and corrected.

The purpose of such an account is to temporarily hold these uncertain transactions until any further information is added to it. This allows for said transactions to be correctly classified when the time comes and to be allocated to the appropriate accounts. It is essential to follow up on such entries, identify the root cause, and solve the problem to clear the suspense account balance as soon as possible. Suspense accounts might seem trivial, but they’re a lifesaver for businesses.

Suspense accounts are vital but can complicate reconciliation, which is crucial for maintaining accurate and compliant financial records. HighRadius offers a comprehensive Record-to-Report suite designed to address these challenges. The Account Reconciliation Software automates the tedious task of matching transactions across various accounts, significantly reducing discrepancies and enhancing efficiency and accuracy. A suspense account in accounting is like a temporary storage room where you keep transactions that do not have a clear place to go in the financial records.

If the credits in the trial balance are larger than debits, record the difference as a debit. If the debits are larger than the credits, record the difference as a credit. A mortgage suspense account is a specific type of suspense account used in the world of home loans and mortgages. It is used exclusively for mortgage payments that cannot be fully applied to a loan account immediately. The following entry can be posted in the accounting system to record the cash in such a situation. When an accounting error is identified, such as a misclassification of expenses, the incorrect entry would be moved to a suspense account while the error is investigated and then ultimately corrected.

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. System errors can occur due to software glitches or technical malfunctions, resulting in incorrect or unintended entries in the accounting system. A suspense account helps to isolate the impact of system errors until the necessary system corrections or manual adjustments can be made.

The business must look at the nature of the account balance and reshuffle to an appropriate chart of accounts. However, some companies have a periodic system to check and resolve the suspense accounts. Suspense accounts on balance sheets are not desirable since they might make it difficult to balance the books appropriately. As cash has been received, an accounting entry will be recorded in the suspense account until the information regarding which invoice the payment is for is provided. A suspense account is a temporary holding account used to record financial transactions that have questions around their accuracy and validity.

No other profession in the world requires the level of accuracy often expected from an accountant. Yet there are times when transactions can’t be fully revealed or classified immediately. This is where a suspense account comes in to avoid major issues relating to accuracy. The suspense account in accounting is a general ledger account used to make temporary unclassified transaction postings until the correct classification can be determined using transaction analysis. For example, if a payment is received without proper details, like the sender’s name or the invoice it relates to. 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.

If you don’t know who made the payment, look at your outstanding customer invoices and find which one matches the payment amount. Contact the customer to verify that it’s their payment and the right invoice. When you make a payment on your mortgage, every penny of that payment usually goes toward paying off interest, principal (the original amount borrowed), and possibly escrow amounts for taxes and insurance.