What is a Suspense Account?

What is a Suspense Account?

A suspense account is an account that records transactions temporarily – ones that are yet to have their proper accounts determined. The suspense account is found on the general ledger and is used for recording certain transaction amounts on a temporary basis. Having said this, all amounts that are recorded in this account shall be moved into another permanent account eventually.

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.

Among other suspense accounts examples, a typical example would be to run a trial balance in order to check a double-entry in the balance sheet of a suspense account. In case of any inconsistencies, that transaction amount will be placed in a suspense account temporarily. This will give the accountant time to correct the balance, after which the amount will be placed back into the original and correct account.

Suspense Account: Definition and Use

A suspense account can be defined as a general ledger account that is used temporarily to store the transaction amounts for which there is uncertainty regarding where they need to be recorded. After the accounting team has investigated the matter to find clarification regarding the purpose of that transaction, they shift it out of the suspense account and back into its original permanent account. The kind of entry in a suspense account can be both a debit or a credit transaction amount.

The reason why it’s useful to have a suspense account over recording transactions is to collect sufficient information about the kind of transaction prior to making an entry for the correct account. Otherwise, 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.

Use of a Suspense Account: So, to put it plainly, the reason why a suspense account needs to be used is to allow sufficient time for research and investigation into the nature of a transaction to take place, while still recording it in the company’s data file. The following are examples of the typical uses of a suspense account:

• In case of payments that are received with invalid or unclear account information, or to the kind of invoice payments that should be applied, etc., ones that can prevent the transaction’s normal posting
• In case of transactions that are in-transit, where money has been sent to a supplier bank but hasn’t yet been deposited into an account, or where the money is received before a policy or contract is drafted
• In case transaction bookings are made before allocating appropriate cost or profit centers
• In cases where amounts are subject to a legal dispute

Apart from businesses keeping suspense accounts as part of their accounting scheme, the use of a suspense account is also made by many insurance companies. Even a typical insurance company is accustomed to keeping hundreds of suspense accounts – which is 20–25% of their total balance sheet accounts – to hold various items.

Accounting Suspense Account Best Practices, and Why Are They Important?

Best practices for a suspense account:

• The accounting head, or those in charge of the business, should regularly review the items in a suspense account. This is in order to shift the transaction amounts into their original accounts in a timely manner. Otherwise, the amounts in the suspense account may grow into substantial proportions and become difficult to deal with after a period of time. This is especially true for those transactions that have minimal documentation as to why they were placed in the suspense account in the first place.
• There should also be an everyday measurement of the balance sheet in the suspense account, used by the controller as the trigger for ongoing investigations. This information is useful to track the transactions that are shunted repeatedly into the suspense account. It helps to enhance the systems and makes it easier to identify such items in the future, therefore keeping them out of the account.
• It is part of a best practice to eliminate all the items in a suspense account by the end of the fiscal year, or else the business will be issuing statements that may contain unidentified transactions, which could potentially lead to inaccuracies in the statement.

Accounting Suspense Account: Why are Suspense Accounts 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 minimize 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 analyzed 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.

Suspense Account on Balance Sheet

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.

After further investigation, the accountant may find that the payment is intended for their marketing division, so he or she will move the amount to the accurate account, ensuring that they balance it on the sheet. So, the aim of a suspense account in terms of a balance sheet is always to have a balance of zero, which means that everything has been correctly recorded, and there are no anomalies unaccounted for in terms of the transaction. Suspense account on balance sheet may not be ideal, as it can prevent a person from accurately balancing the books. However, for the routine business activities, using a suspense account in accounting is much like placing a document on a pile of ‘to file’. Similar to any piles that need to be filed eventually, suspense accounts cannot hold anonymous amounts forever, so its accurate account will eventually be determined. Big businesses can clear their suspense accounts quarterly, while small firms can do so more regularly.

Suspense Accounting Examples

The following are a few examples of suspense accounts, or when is it viable to use or open one:

1. In Case the Payee is Unknown
   If a payment has been made to the firm, but they don’t know who’s sent the payment, then the accountant will need to place that amount in a suspense account until further investigation has taken place. Once the accountant has checked the invoices or other correspondences, and confirmed them with the client/customer, then the amount can be moved to the correct account.
2. In Case of Partial Payments
   Partial payments can be tricky to match up with the invoices, whether it is intentional or accidental. The accountant or those in charge can hold the payments in a suspense account until they figure out which accounts the transactions belong to. For instance, if the financial institution receives a partial payment of $50 from a customer, they need to first open a suspense account. Then, the accountant will credit $50 to the suspense account and debit the cash account for the same transaction amount. Once the firm receives the full payment from the customer, they’ll debit $50 from the suspense account and credit the receivable accounts for the same amount. After the process is complete, the accountant can finally close the suspense account and move the payment to the accurate account.
3. In Case One Can’t Classify a Transaction
   This situation can occur in the case of a small business owner or senior in charge who might not know how to classify a transaction. If this is the case, they can open a suspense account before they take assistance from their accountant. For instance, a supplier may send an invoice of $1,000 for the services. If the person in senior authority is unsure about which department of their business they should charge, they can temporarily place this amount in a suspense account. To do this, they need to first open a suspense account. After which, they need to debit the suspense account and credit the accounts payable. Later on, once the department is clarified, the accountant or manager can easily bill that department. For example, the supplies account of the purchasing department. Finally, to close the suspense account, the accountant will credit the suspense account and debit the supplies account for the purchasing department to finish the transaction.

Read More: About the Financial Action Task Force (FATF) organization.
Read More: What is the role of Money Laundering Reporting Officers (MLROs)?
Read More: Which countries are stated in the FATF Grey List?

By Tookitaki | February 22, 2021

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