This account is used to park funds or transactions that cannot immediately be classified into the correct accounting category due to incomplete information or uncertainty. 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. Here are four common scenarios where suspense accounts are utilized, each presented with detailed journal entries to illustrate the proper accounting practices.
You received a partial payment
After identifying the cause of the suspense, the errors or discrepancies responsible for the suspense must be rectified. This may require making adjustments to the relevant journal entries, reclassifying transactions, correcting timing differences, or reconciling conflicting records. Whilst performing a bank reconciliation, Michelle discovered a payment in the bank statement for $120 which was made on 1 September 20X8. At first, Michelle did not recognise the amount so she included this in her accounting records by debiting the suspense account and crediting the bank account. On investigation, she discovered that it was a direct debit for a subscription to an IT support service.
Why are these accounts so important?
If we are not able to ascertain the true nature of a particular asset, then this account will be classified as a current account. Some jurisdictions have rules and regulations regarding suspense accounts because they are considered a control risk. This is because unallocated transactions get more difficult to reconcile with passing time, especially if there is insufficient documentation, and the account balance could grow uncontrollably. Let’s suppose you receive a payment from an unknown entity; or the sender is known but you are not sure which invoice they are paying for.
Recording unidentified payments
When you get the information you need, reverse the suspense account entry and make an entry in the permanent account. This closes out the suspense account and posts the transaction to the correct account. If the credits in the trial balance are larger than debits, record the difference as a debit.
Monitoring and Resolving Suspense Accounts
Suspense accounts are commonly used when there is no paper trail for the transaction or the nature of it hasn’t been informed yet. Nevertheless, the size of these accounts should be fairly small since most transactions are easily categorized in a regular business operation. Suspense accounts allow transactions to be posted before there is sufficient information available suspense account in balance sheet to create an entry to the proper account or accounts. Without entering such transactions, there may be transactions that are not recorded by the end of a reporting period, resulting in inaccurate financial results. Businesses also use a suspense account to record transactions when there are delays between the receipt of money and the proper assignment in the ledger.
Ask Any Financial Question
- A partial payment occurs when a customer does not pay the full amount owed for a transaction.
- A suspense account cannot have a debit balance, it always shows a credit balance.
- Essentially, a suspense account acts as a catch-all category for items that are pending further investigation or resolution.
- In other words, when the trial balance goes out of balance or if the account has an unidentified transaction, it requires you to set up the suspense account.
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. Payments received for invoices with disputed charges are held in a suspense account until the dispute is resolved. At MNO Inc., a customer payment of $2,500 was received for an invoice that had disputed charges. The accounting team placed the payment in a suspense account while the dispute was resolved, ensuring that the funds remained unallocated until it was clear how they should be appropriately applied.
For example, if a bookkeeper is unsure about which account to debit or credit in a transaction, he/she can temporarily place the entry in a suspense account until they receive more information. The errors which do not involve a suspense account will, when discovered, be corrected by means of a journal entry between the ledger accounts affected. The errors which do involve a suspense account will also require journal entries to correct them, but one side of the journal entry will be to the suspense account opened for the difference in the accounting records.
In such cases, a suspense account allows for the entry to be recorded, pending the retrieval or completion of the required documentation. Once the missing documentation is obtained, the entry can be properly allocated. Suspense accounts and error correction are popular topics for examiners because they test candidates’ understanding of bookkeeping principles so well.