A suspense account is used to temporarily record transactions that lack the normal, detailed information that accountants require to make proper journal entries into the business’s accounting records.
It is good business practice to record all transactions. However, all transactions require complete and accurate information before they can be entered into the financial records.
An incomplete transaction should neither be overlooked nor entered improperly. The suspense account provides a place for accountants to temporarily log and track incomplete transactions until more information is obtained.
Once the accountant has enough information, they can reassign the transaction out of the suspense account and into the appropriate account within the general ledger.
Having an outstanding balance in a suspense account does not generally reflect well on a business’s financial statements. A suspense account is considered temporary, and all transactions should eventually be journaled into a different account.
Ideally, a business will have a zero balance in the suspense account—or no suspense account listed—in its financial statements.
Suspense accounts are used by accountants in many different types of situations.
For example, payments may be received with invalid or unclear account information. Other details may also be unclear, such as the amount of the transaction or the payee.
Payments may be received that do not clearly correspond to an invoice. In these situations, the transaction will be entered into the suspense account until more information, such as an invoice, is gathered and the transaction can be correctly assigned.
A partial payment occurs when a customer does not pay the full amount owed for a transaction. Partial payments can come in many different forms, such as a deposit on a real estate transaction or an upfront payment for a service order.
Customers sometimes make partial payments on monthly loan or credit installments. Partial payments will be entered into a suspense account until the full payment is received.
Businesses also use a suspense account to record transactions when there are delays between the receipt of money and the proper assignment in the ledger. For example, money may be transferred to a bank but not deposited into an account, or when money is received by a customer before a policy or contract is written.
Transactions that are booked before an allocation is made to the appropriate cost or profit center will be recorded in the suspense account until they can be properly assigned.
Amounts subject to legal dispute are also recorded in a suspense account.
Finally, internal bookkeeping errors, such as overstated or understated balances, duplicate entries, or incomplete or partial entries are recorded in the suspense account until the error can be adjusted.
After an entry in the suspense account is clarified, it will be assigned permanently to the proper account. For example, an entry for a payment will be cleared from the suspense account and entered into the accounts receivable once the corresponding invoice has been identified and the details about the transaction are known.
A trial balance is a worksheet with totals of all accounts in the general ledger. Trial balances are usually prepared at the end of the reporting period to make sure that all credits and debits are equal. A suspense account may be added to the trial balance when there are understated or overstated balances that cannot be corrected before the end of the reporting period.
Suspense accounts allow transactions to be posted before there is sufficient information available to create an entry to the proper account or accounts. Without entering such transactions, there may be transactions that are not recorded by the end of a reporting period, resulting in inaccurate financial results.
Because the suspense account reflects transactions that are not fully documented or properly assigned, it can be hard to know on which side of the ledger they belong.
When the trial balance shows credits exceeding debits, the difference should be recorded as a debit to reflect the temporary nature of those funds.
Likewise, if the trial balance shows debits are larger than credits, the difference should be entered as a credit because the amount will be cleared once the difference has been reconciled.
Because transactions in a suspense account are unallocated, the account should be considered temporary.
Having a suspense account containing a balance on the financial statements does not generally reflect well on the overall health of the business. Therefore, transactions in the suspense account should be cleared regularly and as soon as possible.