Suspense Account in accounting, we know every payment or every amount is recorded in the right books, but some transactions come from an unknown identity. Their invoices do not match other transaction data. In this situation accountant doesn’t leave the entry blank; they temporarily move that transaction from the suspense account. This solution looks like a holding box where Unknown transactions stay until they find the correct account.
In this Article, you’ll learn what suspense means, why we use it, and how it helps keep accounts correct. So, go through this article for a better understanding of a suspense account.
What Does Suspense Mean in Accounting?
Suspense in accounting is a temporary holding account where transaction that cannot be properly identified or classified at the time of recording is kept. You can relate it to a short-term parking space for money whose purpose or source is still unknown. So, if there is a payment on the bank statement but the accountant doesn’t know which customer sent the money or which invoice it is, then the amount is put into the suspense account until the accurate details are confirmed. It’s a way of ensuring that the books remain accurate and that no errors are made in the financial accounting records.
The entry is taken out of the suspense account and recorded in the correct account once the missing information has been located. It is a temporary holding account of uncertain transactions only, and your accounting should remain clean, organized, and error-free, so there shouldn’t be a long period for which a suspense account is still open.
When Is a Suspense Account in Accounting Used?
Suspense account is adopted when a transaction is not clear or is lacking some parts. It allows you to go on with your accounting work without having to stop everything because of one puzzling entry.
- When details are missing: Like money is said to be received, but it is not known from which customer.
- When account allocation is unclear: When you are not sure whether the entry is an expense, income, asset, or liability.
- Bank Reconciliation: When the bank statement and books do not match, the difference is deposited in the suspense account.
- When Errors are found: If there is a mistake in bookkeeping, but it is not fixed immediately, the amount is temporarily kept in suspense.
- When the trial balance doesn’t tally: When there is a debit-credit mismatch, the difference is kept in the suspense account until the error is corrected.
How a Suspense Account Works
A suspense account in accounting works as a temporary holding place for business transactions that are unclear or unclassified, such as unidentified payments or accounting errors. It allows a business to continue its bookkeeping while it investigates and identifies the correct accounts for these transactions. Once identified, the funds or entries are moved out of the suspense account and into their proper accounts, with the goal of the suspense account clearing to a zero balance.
- Unidentified Transaction Occurs: A transaction happens that cannot be immediately posted to its correct account. Examples include a customer payment without a name or an error in a journal entry
- Transaction is Posted to Suspense: the sum is thus temporarily kept in a suspense account in the general ledger. It is a way of maintaining the balances in the books while the matter is being sorted out, thus avoiding an unbalanced trial balance.
- An Investigation is Carried Out: the company tries to find out the proper account for the transaction. It may be an inquiry to get the right customer, figure out the missing side of the double-entry, or rectify the error.
- Transaction is Reclassified: consequently, the first account is changed to reflect the correct account after the proper account has been found. The amount is moved from the suspense account to the proper account, such as “Accounts Receivable” or an “Expense” account.
- Suspense Account is Cleared: After the move, an adjusting entry is made. The suspense account’s balance is ideally cleared, returning the balance to zero, and the books are accurate.
Suspense Account Examples
With the help of an example, understand the suspense in accounting.
- If your debit total does not match with credit total. So the accountant moves your temporary balance into the suspense account and allows for a timely financial report.
- When the company receives a check without any information on the sender. So the company’s bookkeeper put the amount into the suspense account, and once the sender is identified, moved the amount to the correct customer.
- The business owner receives an invoices for service, but the invoice address is missing, so the amount will be held on a suspense account. Until the vendor address is confirmed.
- A payment may be received before a contract is officially signed, or a bank transaction may have been made but not yet credited to the correct account. These are put in a suspense account until the transaction is complete and confirmed.
- If transaction information is unclear at the time of recording. So the accountant put the amount into the suspense account to avoid an error, and after the accountant has more information then they move the amount into the correct customer.
What is a Suspense Account in a Mortgage?
A suspense account in a mortgage is a temporary holding account your lender uses when they receive a payment that they cannot immediately apply to your loan. This usually happens when the payment amount is incorrect, either too low, too high, or missing some details. Instead of rejecting the payment, the lender parks it in the suspense account until the full amount needed for a regular monthly payment is available or until the issue is clarified.
For example, if you pay less than the required mortgage installment, the lender places that partial payment in the suspense account. Once enough money is collected to equal one full payment. It is transferred to your mortgage account and applied toward accounting principal, interest, taxes or insurance. Suspense accounts help prevent errors and ensure payments are properly credited, but leaving money in suspense for too long can cause late fees or negative impacts on your loan status.
How to Clear a Suspense Account?
Break down the steps of how to clear a suspense account in accounting
Review the Suspense Account
First, need to list all the transactions that are currently in the suspense account. And after listing the transaction, note the amount, dates, and all available details of each suspense account.
Check the Transactions
You need to verify supporting documents like income statements and invoice statements, and receipts. If you feel that information is incomplete, then you can contact customer support and suppliers, or the department.
Identify the Correct Accounts
You have to identify the ledger account to determine where each transaction should go to accounts receivable or payable, revenue, etc.
Make Adjusting Entries
After identifying the correct account, you have to transfer the transaction from the suspense account to the correct account in the ledger.
Reconcile the Accounts
Complete the transfer of all transactions you have to ensure that the suspense account balance is zero, and verify that the total debits and credits match in the main ledger.
Document and Record
After ensuring the balance is zero for all transactions, keep updating your accounting records or software with the corrections. And keep that updated record for future reference, which helps to make adjustments in the future.
Analyze and Prevent Future Suspense
Now understand why the transactions went into suspense. And implement procedures to reduce unclear or missing information in future transactions.
Conclusion
Suspense Account in Accounting is a straightforward process that is used to hold the unknown transaction, and after the verification accountant moves that amount to the correct customer. You can use the suspense account when your transaction details are missing, and the account allocation is unclear. And you can easily clear the suspense account in accounting, and with the help of this significant information, you can easily understand the suspense account in accounting.