A suspense account is one that temporarily records transactions that have yet to be assigned to their proper accounts. The suspense account is situated on the general ledger and is used to temporarily store specific transaction amounts. Having said that, any sums recorded in this account will ultimately be transferred to another permanent account.
So, what is the requirement for a suspense account in the first place?
A suspense account is needed because the appropriate account was not determined at the time the transaction was being recorded. As long as a transaction is found in a suspense account and hasn’t yet been transferred to its permanent account, it is placed in the suspense account, acting as its holding account for the transaction. Having a larger number of unreported transactions would mean that it won’t be recorded by the end of the reporting period, resulting in inaccurate financial outcomes.
Why are these accounts so important?
- They allow the transactions to be posted before any sufficient information is available to create an entry for the correct account(s). Without posting these transactions, there may be transactions that aren’t recorded by the end of a reporting period, which could result in inaccurate financial results.
- The items in a suspense account represent unallocated amounts. As such, having the account presented on financial statements with a remaining balance may be viewed negatively by outside investors. Therefore, suspense accounts should be cleared by the end of each financial period.
- Using a suspense account allows the accountant to review each individual transaction in the account before they clear it. The objective here is to shift the transaction to its original/permanent account in time.
- With more time, transactions can become difficult to clear, especially with minimal documentation. This explains why the transaction was put in a suspense account in the first place. To minimise this possibility in the future, items are tracked with the balance sheet.
- Suspense accounts are also known to be a control risk and, under the Sarbanes-Oxley (SOX) Act of 2002, it’s required that the accounts are analysed by the type of product, its aging category, and business justification, so that it’s understood exactly what is in the account. Also, this information needs to be shared with the auditors on a regular basis.
The following are a few examples of suspense accounts, or when is it viable to use or open one:
- If the payee is unknown
If a payment is made to the business but the accountant does not know who sent it, the sum must be placed in a suspense account until additional inquiry is completed. Once the accountant has reviewed the invoices or other communications and validated them with the client/customer, the funds can be sent to the appropriate account.
- In the event of partial payments
Partial payments, whether intended or unintentional, can be difficult to reconcile with bills. The accountant or those in control can place the payments in a suspense account until they can determine whose accounts the transactions belong to. For example, if a financial institution gets a $50 partial payment from a customer, it must first create a suspense account.
The accountant will then credit the suspense account with $50 and debit the cash account with the same transaction amount. When the company gets the entire payment from the customer, they will debit $50 from the suspense account and credit the receivable accounts with the same amount. When the process is finished, the accountant may finally terminate the suspense account and transfer the money to the correct account.
- In case one can’t classify a transaction
This situation can arise when a small business owner or senior executive is unsure how to classify a transaction. If this is the case, they might create a suspense account before they receive aid from their accountant. For example, a supplier may deliver a $1,000 invoice for services. If the person in charge is unclear which department of their company should be charged, they can temporarily store this sum in a suspense account.
To do so, users must first create a suspense account. After which, they need to debit the suspense account and credit the accounts payable. Once the department has been specified, the accountant or management will be able to quickly bill that department. For example, the buying department’s supply account. Finally, for the buying department to complete the transaction, the accountant will credit the suspense account and debit the supply account.
Best Practices for Accounting
Best practices for a suspense account:
- The accounting head or those in charge of the firm should evaluate the things in a suspense account on a regular basis. This is done to ensure that the transaction monies are returned to their originating accounts as soon as possible. Otherwise, the balances in the suspense account may increase to significant proportions and become difficult to manage over time. This is especially true for transactions with little evidence as to why they were kept in suspense in the first place.
- There should also be an everyday measurement of the balance sheet in the suspense account, utilised by the controller as the trigger for ongoing investigations. This data is valuable for tracking transactions that are regularly redirected to the suspense account. It helps to strengthen the processes and makes it simpler to recognise similar products in the future, hence keeping them out of the account.
- It is recommended practice to erase all things in a suspense account at the end of the fiscal year, or otherwise the company may issue statements that may contain unidentified transactions, which could lead to mistakes in the statement.
Suspense Account on Balance Sheets
For an accountant to show a suspense account on balance sheet documents is more direct than it seems, because it isn’t much different from other accounts. For instance, if the accountant or the owner isn’t sure which account to place a transaction into, then it’ll be moved to the suspense account for the time being. Also, a balance sheet will be placed on that account.
Following additional research, the accountant may discover that the money is intended for their marketing section, in which case he or she will transfer the funds to the correct account, ensuring that it balances on the balance sheet.
So, in terms of a balance sheet, the goal of a suspense account is always to have a balance of zero, indicating that everything has been accurately recorded and that there are no abnormalities unaccounted for in terms of the transaction. Suspense accounts on balance sheets are not desirable since they might make it difficult to balance the books appropriately.
Using a suspense account in accounting, on the other hand, is analogous to putting a paper on a pile of ‘to file.’ Suspense accounts, like any other stacks that must be filed eventually, cannot store anonymous sums indefinitely, therefore their correct account will be found at some point. Large corporations can clear their suspense accounts periodically, whereas small enterprises can do so more often.
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