Definition of suspense account:
A suspense account is a temporary account where all the suspicious and unclear transactions of the accounting system are parked. However, once the nature of the balance is confirmed, it’s reshuffled to the proper chart of account. Auditors and internal control advisors are particularly concerned about the suspense balance and inquire management about the same.
The world of accounting is complex and dynamic. Sometimes, accountants and bookkeepers come across some complex situations where it’s difficult to identify the nature and type of the accounting transaction. So, they decided to park the transaction in a temporary account called a Suspense account.
However, parking in the suspense is not an end. The business must look at the nature of the account balance and reshuffle to an appropriate chart of accounts. Some businesses resolve the suspense accounts on an ongoing basis. However, some companies have a periodic system to check and resolve the suspense accounts.
Although recording the suspense is not considered a good sign for internal controls of the business. Still, it’s better to record an unclear transaction in the accounting record than to leave it at all. Otherwise, material and important information might be omitted and go unnoticed, which is, of course, not advisable from a user perspective.
Sometimes, at the time of closing, the account debit and credit in the trial balance do not match each other. To balance the TB and close the accounts, an accountant/bookkeeper may decide to close the TB and keep the balance in the suspense. However, it’s not encouraged practice.
Example of using suspense accounts
You have received cash from one of the credit customers amounting to $10,000.However, the customer has not specified the invoice from the outstanding ten invoices he has paid. Further, an accounting system does not allow the recording of receipts without invoice tracking. So, the question arises of how an accountant/bookkeeper should record the collection.
The simple answer is opening the suspense account and recording the cash. The following entry can be posted in the accounting system to record the cash in such a situation.
|Cash and bank||XXX|
However, once information is obtained from the customer regarding the invoice number they have paid, the suspense is reversed, and receivable is credited with the following journal entry.
When is a suspense account to be used in the books of accounting?
Suspense is frequently used in the books of accounting in the following circumstances.
- When a total of debit and credit does not match – once closing balance from the ledgers is obtained and trial balance is compiled if there is any difference in the debit and credit, it can be posted in the suspense account.
- When there is uncertainty regarding the maker of the payment, the transaction is posted in the suspense account.
- When the bookkeeper/accountant of the business is uncertain about the classification of the transaction, it can be temporarily posted in the suspense account.
A suspense account is created in the books of accounts when the bookkeeper/accountant of the business is uncertain about some business transactions. It’s a temporary account and reversed when the accurate account is classified.
Also read, elements of financial statements.