What is Suspense Account?
A suspense account is an account in the general ledger used to temporarily store transactions that require further analysis and rechecking before a permanent version can be made in the record books. It's an account where you can make ambiguous entries until you find where those funds came from or receive full payment from a client.
The nature of the suspense account is that it's a short-term account as you need to transfer your funds back to your regular account. Many have an interest suspense account because it's a place where you can take time to figure out where you can put entries that have to be rechecked.
Importance of a Suspense Account
A suspense account has a general ledger that you can use for the temporary recording of business transactions. The need for a suspense account arises when you are unable to identify the appropriate ledger account for the transactions which have been recorded. The amount of capital or transformation that is moved to the suspense account is for a brief period. You will need to do a proper investigation to determine the correct ledger account and where the amount should be moved or added. When you are looking to invest money, you can transfer your funds to a suspense account until you decide where to invest that capital.
Example of a Suspense Account
A supplier delivers an invoice of $4500 of services, which is payable in 15 days. The accounting department is unsure about which department will be charged with the invoice, so the accounts department makes the following invoice, while the departments discuss who is responsible for the payment of the invoice.
The accounts department records the invoice in the accounts payable system so that the firm can clear it in 15 days. The department heads decide that the invoice belongs to the marketing department and they should be charged for it. So, the accounting staff makes the following entry:
When should you create a Suspense Account?
Below are suspense account examples that will give you an idea of when you can open a suspense account.
Trial Balance Preparation: A suspense account is an account that is useful when the debit and credit balance in the balance sheet do not match. The difference in the amount of credit and debit can be the reason to create a suspense account. When the credit side balance is larger than the debit balance, the difference is recorded as debit. If the debit side balance is larger than the credit side, the difference is registered as a credit.
Partial Payment: Supposedly, the client makes a partial payment and is unsure about which invoice the payment was made, which leads to confusion about the partial payment. These transactions can be moved to the suspense account till you contact the client and identify the correct invoice.
Unsure About When the Payment was Made: You can create a suspense account if someone makes a payment but is uncertain about who made the payment. You can move the transaction to a suspense account, check the record books, and match the payment details with the invoices. However, if you can still identify who it is, you should contact the person who made the payment and verify the payment details.
Benefits of a Suspense Account
There are many benefits of a suspense account. Some of them are listed below.
A suspense account gives you a temporary space for recording unambiguous transactions.
This account helps you keep the account books organized by separating the unidentified transactions.
Uses of Suspense Account
The use of a suspense account allows the company to research the nature of a transaction while recording it in the company's books. Here are some of the uses of a suspense account:
When payment is received with invalid account information, you should transfer the payment to a suspense account till you solve the issue.
In-transit transactions where money has been transferred to an office supplier's bank, but it hasn't been deposited yet in an account, or when cash is received before the company makes a policy or contract.
When booking transactions are made before an allocation is made to the company.
When the amount is subject to a legal dispute.
While companies include a suspense account within their accounting system, they are concerned for the insurance companies. Ordinarily, an insurance company has hundreds of suspense accounts that hold thousands of items.
Suspense accounts act as an important addition to many business organizations. They help these organizations in rechecking their transactions when the debit and credit sides of their account statement don’t match each other. A suspense account helps organizations like insurance companies, mortgage service companies, etc run smoothly because many of their customers don’t make payments on the due dates. It’s important to know about suspense accounts because sometimes you will need to recheck some transactions when in the account statement the debit and credit sides don’t match.
FAQs on Suspense Account: What You Should Know
1. What is a Suspense Account in accounting?
A Suspense Account is a temporary account in the general ledger used to record unclassified transactions or discrepancies. Its primary purpose is to hold the difference amount that arises when the debit and credit totals of a Trial Balance do not match, allowing accountants to proceed with preparing financial statements while investigating the source of the error.
2. What is the nature of a Suspense Account and where is it shown in the final accounts?
A Suspense Account is temporary and has no fixed nature; it can have either a debit or a credit balance. Its treatment in the final accounts depends on its balance at the end of the accounting period:
- If the Suspense Account has a debit balance, it is shown on the Assets side of the Balance Sheet.
- If the Suspense Account has a credit balance, it is shown on the Liabilities side of the Balance Sheet.
The ultimate goal is to clear the account by rectifying all errors, making its final balance zero.
3. How does a Suspense Account help when a Trial Balance does not tally?
When the total of the debit column in a Trial Balance does not equal the total of the credit column, the difference is placed in a Suspense Account to make them agree temporarily. For example, if the debit side is short by ₹500, the Suspense Account is debited with ₹500 to balance the Trial Balance. This step is a practical measure that facilitates the timely preparation of the Income Statement and Balance Sheet, preventing delays caused by the search for one-sided errors.
4. What are some common examples of errors that lead to opening a Suspense Account?
A Suspense Account is typically opened to handle one-sided errors. Common examples include:
- Error of partial omission: An entry is correctly recorded in the subsidiary book but is not posted to the ledger (e.g., goods sold to a customer are recorded in the Sales Book but not posted to the customer's account).
- Posting to the wrong side of an account: An amount that should have been debited is instead credited, or vice versa.
- Error in casting (totalling): A mistake made in totalling a subsidiary book, like the Sales Book or Purchases Book.
- Posting the wrong amount: A correct amount in a subsidiary book is posted with an incorrect figure to a ledger account.
5. How is a Suspense Account closed or cleared after errors are located?
A Suspense Account is closed by passing rectification journal entries. Once an error is identified, a correcting entry is made that debits or credits the Suspense Account to cancel out the original discrepancy. For instance, if a purchase of ₹1,000 was wrongly debited to the supplier's account instead of the Purchases Account, the rectifying entry would be to debit the Purchases Account and credit the Suspense Account. This process is repeated until all errors are fixed and the balance in the Suspense Account becomes nil.
6. Why is a persistent balance in a Suspense Account considered a red flag for a business?
A persistent or large balance in a Suspense Account is a significant concern because it indicates underlying issues in the accounting process. It suggests that there are unresolved errors, weak internal controls, or a lack of proper bookkeeping. This reduces the reliability and accuracy of the financial statements, potentially hiding losses or misrepresenting the company's financial health to investors, lenders, and management.
7. How is a Suspense Account different from a Provision or a Reserve Account?
These accounts serve very different purposes:
- Suspense Account: A temporary account to hold an unknown discrepancy arising from an accounting error until it is identified and corrected.
- Provision: A charge against profit to account for a known liability where the exact amount is uncertain (e.g., Provision for Doubtful Debts, Provision for Warranty Claims).
- Reserve: An appropriation of profit set aside for strengthening the financial position of the company or for a specific future purpose (e.g., General Reserve, Capital Reserve).
In short, a suspense account deals with errors, a provision deals with expected liabilities, and a reserve deals with profit allocation.
