Suspense Account: How Does it Work and Example


Key Takeaways:

  • A suspense account is a temporary destination for transactions or balances that cannot be immediately classified or identified. It serves as a holding area until the information needed to categorize the transaction or balance is available.
  • A suspense account works by temporarily holding transactions or balances until enough information is obtained to assign them to the proper accounts. Once the information is available, the transactions or balances are transferred out of the suspense account and into their correct accounts.
  • There are two types of suspense accounts: temporary and permanent. Temporary accounts are used for transactions that require clarification and reconciliation, while permanent accounts are used for transactions that cannot be easily resolved and must be segregated indefinitely.
  • Examples of temporary suspense accounts include accounts for undiscovered bank errors, unmatched transactions, and credit/debit balances. Examples of permanent suspense accounts include accounts for abandoned property, dormant accounts, and unresolved discrepancies.

Are you intrigued to understand the intricate working of a suspense account? Then you are in the right place! In this article, we will take you through the details of a suspense account and how it works. You will also get to learn the different types and an example of a suspense account.

Definition of Suspense Account

A Suspense Account is a temporary account used by businesses to record transactions with incomplete or insufficient information. It serves as a holding account until all the details are sorted out and then the transactions are moved to their appropriate accounts. This allows businesses to maintain accurate financial records while ensuring that the transactions are not lost or misinterpreted. A Suspense Account is typically used when there is uncertainty about where to record a transaction.

When a transaction occurs, it may not be immediately clear which account it should be recorded under. For example, if a business receives a payment from a customer but the payment is not associated with a specific invoice, it may be unclear which account to debit. In such cases, the transaction can be recorded in the Suspense Account until the information is available to allocate it to its correct account.

It is important to ensure that transactions are not left in the Suspense Account for a long time, as it can affect the accuracy of financial statements and make it difficult to reconcile accounts. Additionally, businesses should have procedures in place to monitor transactions in the Suspense Account and ensure that they are resolved in a timely manner.

In a real-life scenario, a small business owner received a payment from a customer but was unsure which product it was for. Rather than creating a new account, she recorded the transaction in the Suspense Account until she could verify which product the payment was for. Once she received confirmation from the customer, she moved the transaction to the appropriate account. This allowed her to maintain accurate records without creating unnecessary complexity in her accounting system.

How a Suspense Account Works

A Suspense Account is used as a temporary holding account when there are discrepancies in accounting records. Instead of immediately correcting the error, transactions are posted to the Suspense Account, allowing the company to continue operations while the issue is resolved. The Suspense Account is ultimately reconciled with the original accounts, and any differences are resolved.

The process of using a Suspense Account involves identifying the transaction that led to the discrepancy and posting it to the Suspense Account. From there, the error is investigated, and the necessary adjustments are made. For example, if a payment was incorrectly recorded, it would be posted to the Suspense Account, and the cause of the discrepancy would be investigated. Once the error is corrected, the payment is recorded in the correct account.

It is important to note that Suspense Accounts should be used sparingly, as they can become a source of confusion and can complicate accounting records. Additionally, using a Suspense Account does not excuse companies from resolving the underlying issue causing the discrepancy.

A true fact from Investopedia states that Suspense Accounts are also commonly used by banks to temporarily hold funds in cases of suspected fraud or money laundering.

Types of Suspense Accounts

Suspending Accounts by Category

There are diverse categories of Suspense Accounts, which serve unique purposes. Each of these types is created for specific financial transactions. Some common types of Suspense Accounts include:

  • Clearing Suspense Accounts created to track and temporarily lodge payments and receipts that need to be reconciled.
  • Outstanding Cheques Suspense Accounts created to track and classify cheques that have been issued but have not been deposited or collected.
  • Service Suspense Accounts created to hold payments related to services that have been rendered but have not yet been classified.
  • Unclaimed Suspense Accounts created to save unclaimed customer deposits.
  • Fractional Share Suspense Accounts created to track and hold pending payments related to stock trades that result in fractional shares.
  • Adjustment Suspense Accounts created to track account adjustments before being posted to final operating accounts.

Banks use Suspense Accounts to manage various financial transactions effectively and ensure the provision of timely and accurate financial reports. As such, these types of accounts are used in virtually all banks globally.

Suspense accounts are an integral part of banks' operational processes. For instance, during the 2008 financial crisis, the US banking sector witnessed an increase in outstanding cheques that created unprecedented financial challenges for banks. Banks created Outstanding Cheque Suspense Accounts to curtail the challenge.

Examples of Suspense Account

To illustrate the concept of suspense account, below are some examples of how this account works in practice.

For instance, when a business makes a payment to a supplier but does not receive an invoice immediately, it records the payment as a suspense account entry. Similarly, when a company cannot determine the correct allocation of a particular transaction, it temporarily records the transaction in the suspense account. In such cases, the relevant information will be entered into the account once it becomes available.

Here is a table showing examples of transactions that are recorded in a suspense account:

Type of TransactionDescription Payment without invoiceA payment made to a supplier without an invoice received Unidentified bank receiptA receipt that cannot be identified with a specific invoice Errors in accountsAn incorrect entry in the books of accounts Bank errorsA discrepancy in bank statements Unmatched transactionsTransactions that cannot be matched with a corresponding entry

It is important to note that suspense accounts are not a permanent solution to incomplete or erroneous transactions. These entries are just temporary measures taken to prevent the occurrence of irregularities in the books of accounts. If no new information is provided, the entries will eventually need to be written off or reversed to the appropriate accounts.

According to Investopedia, "companies use suspense accounts to make sure that financial records are accurate and to identify and resolve discrepancies quickly."

5 Well-Known Facts About What Is a Suspense Account? How It Works, Types, and Example:

  • ✅ A suspense account is used to temporarily hold financial transactions that cannot be immediately categorized or reconciled. (Source: The Balance)
  • ✅ Suspense accounts can be used by individuals and businesses, and are often used in accounting and bookkeeping. (Source: FreshBooks)
  • ✅ There are different types of suspense accounts, including asset suspense accounts, liability suspense accounts, and revenue suspense accounts. (Source: Accounting Tools)
  • ✅ Suspense accounts are usually cleared when the transactions they hold are properly reconciled and categorized. (Source: QuickBooks)
  • ✅ Example of a suspense account is when a bank receives a check but can't immediately verify if the account has sufficient funds to cover it, so the amount is held in a suspense account until the check is cleared or bounced. (Source: The Nest)

FAQs about What Is A Suspense Account? How It Works, Types, And Example

What is a suspense account?

A suspense account is a temporary holding account used in accounting to post transactions with incomplete information or discrepancies. It is also used to temporarily hold funds during a transaction's processing until all accurate information is available.

How does a suspense account work?

When a transaction is entered, and there is incomplete information or discrepancies that need to be resolved, the transaction amount is posted to a suspense account instead of the actual account. The suspense account temporarily holds the transaction until all information is available to correctly post the transaction to the appropriate account.

What are the types of suspense accounts?

The types of suspense accounts include a general suspense account, a cash suspense account, and a revenue suspense account. The general suspense account is used to hold transactions with incomplete information. The cash suspense account holds funds that cannot be matched to any other accounts, and the revenue suspense account holds revenue that cannot be identified to a specific department or product.

What is an example of a suspense account?

An example of a suspense account is when a company receives payment that cannot be matched to a particular invoice or customer account. The payment is posted to the cash suspense account until the appropriate invoice or customer account can be identified.

What happens to funds held in a suspense account?

Once all information is available and the discrepancies have been resolved, the funds held in a suspense account are moved to the appropriate account. If the transaction cannot be completed, the funds may be reversed back to the original source or company.

Why are suspense accounts important in accounting?

Suspense accounts are important in accounting because they allow for the continued recording of transactions that have incomplete information or discrepancies. Suspense accounts help to prevent errors in final financial statements and ensures that transactions are accurately recorded.