Suspense account is the general ledger account that is used by the company for recording the transactions temporarily as at the time of recording those transactions, the accountant may be unsure of the type of account that is most appropriate to record those transactions.
Suspense Account Meaning
Suspense Account is a general ledger account in which transactions are temporarily recorded until the time their actual nature can be ascertained. Sometimes, we don’t have all the necessary information for a particular transaction but we need to record every transaction in order to keep our ledger books up to date and this is where suspense account comes handy as we are not sure where to record general ledger entries.
- As the name suggests, all the transactions recorded in this account are “suspense” for the accountant and hence we need to gather more information about the nature of these transactions so as to move them in their correct accounts.
- It is very important to understand that all the transactions are temporarily recorded in this account and although there is no standard amount of time set by regulatory authorities for clearing out a suspense account we should move all the transactions in their correct accounts as soon as we can ascertain their correct nature.
- This account is not meant to manipulate the books of account rather it is used to give some leeway to the accountant to find the correct nature of some transactions so as to make the ledger books more robust.
- Depending on the nature of the transaction, it can be hold either an asset or a liability. If we are not able to ascertain true nature of a particular asset then the suspense account will be classified as a current account and in similar ways, it could be used to park an “unclassified” liability as well.
Suspense Account Examples
The following are the examples of Suspense Account
Suspense Account Example 1
An accountant was asked to record a few journal entries written by the finance head of a large corporation. There was one transaction whose nature could not be ascertained at the time of recording and in order to complete the assignment by the deadline, the accountant recorded the “unclassified” amount in the general ledger suspense account.
He will move the amount from the Suspense account to the appropriate account as soon as he will get more information about the nature of the transaction and hence suspense account helped him to keep the transaction into books of accounts and at the same time, deter him from putting it under the wrong category.
Suspense Account Example 2
When you receive cash of $100 from the client but not sure about the transaction against which he made this payment then you can 1st pass this entry and once you could determine that then you can reverse this transaction in the following manner-
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How Suspense Accounts are used in the Real World?
There are various situations where we use a suspense account, some of which are mentioned below:
#1 – When preparing a trial balance
A trial balance is the closing balance of an account that we calculate at the end of the accounting period. When the two sides of trial balance don’t match, we hold the difference in a suspense account until we correct it. If the debits in the trial balance are larger than credits, we record the difference as a credit. If the credits are larger than debits, we record the record the difference as a debit. We close the account after making the necessary adjustments so that it’s no longer part of the trial balance.
#2 – Uncertainty regarding the payment maker
When we are unable to match the payment from a particular client with the account receivables balance then we can park that payment in suspense account to match client outstanding dues with the payment and cross verify it with the client.
#3 – Uncertainty regarding the classification of the transaction
When the business is unsure about the account in which they need to park a particular transaction then it is best to put the transaction in suspense account and consult with your accountant before taking any decision.
It helps you keep your accounting books in an organized manner. It helps in ensuring that all the transactions are recorded under correct heads and thereby improving the quality of bookkeeping and proper representation of all the transactions. It is like a temporary shelf where all the “miscellaneous” items can be parked until the time their actual nature can be ascertained. When we record uncertain transactions in permanent accounts then it might create balancing issues. It helps us to avoid recording transactions in the wrong accounts. But in the end, we should make sure to reduce the suspense account balance to zero and transfer all the entries in their respective accounts to give a better representation of our books.
This has been a guide to what is Suspense Account, its definition, and meaning. Here how to use suspense accounts in the real world along with practical examples. You can learn more about accounting with the following articles –