Suspense Account Meaning
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.
Sometimes, we don’t have all the necessary information for a particular transaction. Still, we need to record every transaction 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 ledgerGeneral LedgerA general ledger is a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance.read more 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 to move them in their correct accounts.
- It is vital to understand that all the transactions are temporarily recorded in this account. Although there is no standard amount of time set by regulatory authorities for clearing out this account, we should move all the transactions in their correct accounts as soon as we can ascertain their exact nature.
- This account is not meant to manipulate the books of account. Instead, it is used to give some leeway to the accountant to find the true nature of some transactions to make the ledger books more robust.
- Depending on the nature of the transaction, it can be either an asset or a liabilityAn Asset Or A LiabilityWhat makes Assets & Liabilities different is that while the former refers to anything that a Company owns to gain long-term economic benefits, the latter refers to anything that the Company owes to other parties. read more. If we are not able to ascertain the true nature of a particular asset, then this account will be classified as a current account. In similar ways, it could be used to park an “unclassified” liability as well.
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For eg:
Source: Suspense Account (wallstreetmojo.com)
Suspense Account Examples
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. 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 gets more information about the nature of the transaction. Hence this 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.
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-
How are Suspense Accounts used in the Real World?
#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 the 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 debitsDebitsDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more, we 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 the suspense account to match the client’s 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 a suspense account and consult with your accountant before making any decision.
Conclusion
It helps you keep your accounting books in an organized manner. It helps in ensuring that all the transactions are recorded under correct heads. It is thereby improving the quality of book-keeping 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.
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