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
1. When should you create a suspense account?
You need to create a suspense account when you find some details missing from your account book. For instance, the debit and credit sides don't add up when the trial balance is prepared. The difference that you find is the trial balance can be transferred to a suspense account secondly, if you have received a partial payment from a client. You can transfer the amount to a suspense account until you figure out which invoice has been cleared. You can quickly go back to the record and check which invoice matches the amount that has been transacted. Lastly, if you cannot see who has made a transaction, then move the amount to a suspense account. You can move it back to your record after you come to know who made the transaction.
2. What are the uses of a suspense account?
Suspense accounts are typically helpful when a company is researching the nature of the transactions and recording it in its books. There are many uses of a suspense account. Firstly, it helps you check when the amount of a transaction is subject to a legal dispute. Secondly, when there's a transaction booking before, there's an allocation of reasonable costs or profit centres. Thirdly, when an in-transit transaction, the money is transferred to another person, but it hasn't been deposited into the account yet. There are times when the company receives money even before they make a contract or a policy. Lastly, there's a transaction from an invalid account that has invoiced payments because of some issues.