What is Suspense Account – Its Examples, and How It is Used?
Many situations only give access to limited financial transactional data a company needs for accounting. This can delay your transaction entries and cause several errors and omissions later. It is necessary to record each such transaction even if the information is limited. In such cases, a company can take the help of a suspense account to record all such unclassified transactions in accounting.
Here’s a detailed account on what a suspense account is, its importance, uses, benefits and more. Read on!
What is a Suspense Account?
A suspense account is a general ledger that a company uses for recording unclassified transactions. This type of account is used because, at times, an accountant cannot determine the most appropriate account heads in a general ledger to enter certain transactions.
Furthermore, it also acts as a temporary account to hold entries before deciding on a particular account head to classify them. It can also keep information regarding discrepancies while gathering information.
Importance of a Suspense Account
Here are the different reasons why a suspense account is important:
- A suspense account acts as a general ledger where you can temporarily record business transactions unless you identify the appropriate account head to post them
- These accounts also make sure that the books of account contain all the classified and unclassified transactions accurately
- When investing money, a transfer of funds to a suspense account can take place until you decide where to invest that capital
Examples of Suspense Account
Let us understand the use of a suspense account using the following examples:
Example 1 (Simple):
An accountant has to record a few journal entries written by the finance head of a large business entity. Here, this accountant needed help in identifying the nature of a transaction while recording. How will this accountant record such transactions?
Solution:
The accountant will record this unclassified transaction in the general ledger suspense account to complete his assignments by the allotted time. However, after getting more information about the nature of the transaction, he will move it from the suspense account to its respective account.
Hence, this account helped him hold this transaction in the books of accounts and prevented him from putting it under the wrong account head.
Example 2 (with Journal entry):
Let’s say that there are errors in the account books of ABC Ltd. as on March 31, 2022. The trial balance did not match, showing an extra credit of Rs. 7465.
The details of the journal are as follows:
- Returns inward book was shortcasted by Rs. 500.
- A Purchase of Rs. 1035 was posted to a creditor’s account as Rs. 1000.
- Ram paid Rs. 2500, but her account was wrongly credited with Rs. 4500.
- An amount of Rs. 5000 owed by Rani was omitted from sundry debtors.
Here’s how you can make the necessary journal entries and open a suspense account.
Solution:
In the books of ABC Ltd.
As on March 31, 2022
Journal
| Date | Particulars | L.F. | Dr. (Rs.) | Cr. (Rs.) |
| 1. | Return Inwards A/c …(Dr.) | 500 | ||
| To Suspense A/c | 500 | |||
| (Being totalling of return inwards book corrected) | ||||
| 2. | Suspense A/c …(Dr.) | 35 | ||
| To Creditors A/c | 35 | |||
| (Being creditor account was less by Rs. 35 and hence, corrected) | ||||
| 3. | Ram A/c …(Dr.) | 2000 | ||
| To Suspense A/c | 2000 | |||
| (Being payment wrongly credited to Ram and hence, rectified) | ||||
| 4. | Sundry Debtors A/c …(Dr.) | 5000 | ||
| To Suspense A/c | 5000 | |||
| (Being rectifications made in sundry debtors) |
Suspense A/c
| Dr. | Cr. | ||||||
| Date | Particulars | J.F. | Amount | Date | Particulars | J.F. | Amount |
| 2021 – 22 | 2021 – 22 | ||||||
| March 31 | To Difference in Trial Balance (given) | 7465 | April 04 | By Return Inwards A/c | 500 | ||
| March 31 | To Creditors A/c | 35 | March 31 | By Sundry Debtors A/c | 5000 | ||
| April 30 | By Ram A/c | 2000 | |||||
| 7500 | 7500 | ||||||
When Should You Create and Use a Suspense Account?
The use of a suspense account determines the right time to create it. Some of the situations are as follows:
- When a payment is received with invalid information
- If an amount is subject to a legal dispute
- When transactions are made before allocating to the company
- If an amount is transferred but is not deposited in an account or when cash is received before the implementation of a new policy by the company
How to Create a Suspense Account?
These are the steps to create a suspense account and use it to hold unclassified transaction and close it down later:
Step 1: Open a suspense account in a general ledger to record respective journal entries
Step 2: Enter the total amount at issue. The format of suspense account entries will either have a debit or credit structure
Step 3: Now, enter the same amount with a different entry in another account
Step 4: Revert the suspense account entry and create a record in the permanent ledger account after getting the information
Step 5: Close this suspense account and post the transactions to their respective correct account
How Are Suspense Accounts Used in the Real World?
There are various circumstances that require accountants to put transactions in a suspense account. Some of them have been discussed below:
1. Preparation of Trial Balance
A suspense account is helpful in a trial balance when the debit and credit totals do not match. The difference in debit and credit balance can result in creation of a suspense account. This balance is debited if the credit balance is larger than the debit balance. On the other hand, if the debit balance is more, then the balance is credited.
2. Receiving Partial Payment
Sometimes, there needs to be clarity regarding payments due by a client because of unclear invoices. These payments are thus kept on hold and get transferred to a suspense account until this problem is rectified and the invoice is determined.
3. Uncertainty Regarding Payment Maker
There can be lack of surety regarding a payment made by a client with respect to the accounts receivable balance. In these situations, a suspense account is passed to match the outstanding dues with payments and verify them with the client.
4. Uncertainty Regarding the Classification of Transaction
When a business is unsure about the account in which a particular transaction has to be parked, it uses a suspense account. However, a brief consultation with the respective accountant is necessary before taking such steps.
5. During Purchasing a Fixed Asset But Not Receiving It Until Full Payment
When a fixed asset is purchased on a monthly payment basis, delivery of the asset takes place after complete payment. In this case, preparing a suspense account is necessary. However, after paying the last instalment and receiving the asset, you need to close the particular suspense account and enter this transaction into a new asset account.
What Are the Advantages of a Suspense Account?
The main advantages of a suspense account are:
- A suspense account keeps the book of accounts organised by separating the unidentified transactions.
- This account allows a temporary space for recording transactions that are unambiguous.
What Are the Disadvantages of a Suspense Account?
A suspense account is a temporary holding account to record transactions that are subsequently reallocated to other accounts. However, if the clearing of suspense accounts is not appropriately monitored and managed, there can be a risk of erroneous financial results and fraudulent activities.
Difference Between Suspense Account and Clearing Account
Although a suspense account and a clearing account are quite similar, there are some glaring differences between the two:
| Suspense Account | Clearing Account |
| A suspense account does not have a fixed closing time and can only be closed after solving the uncertainties | A clearing account is closed at a scheduled time, daily or monthly |
| It holds transactions during an error | It holds transactions that are to be posted later in order to avoid any error |
| The account head for a particular transaction is initially unrecognised | The account head is recognised at the beginning |
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Final Word
Suspense accounts are necessary for many businesses as they allow rechecking transactions when debit and credit balances do not match. It helps organisations, like insurance companies, run smoothly as many of their customers fail to make payments on due dates. Furthermore, suspense accounts also help to keep the book of accounts organised and avoid any legal disputes.
FAQs
Ans: No, it is not necessary to close a suspense account as long as you are taking note of incorrect transactions in it. However, terminating a suspense account occasionally is an excellent practice as it creates sufficient time and speed to adjust books of account.
Ans: A suspense account can be located in any or all of the following types of accounts:
• Asset: Stores payments related to accounts receivable.
• Liability: Stores payments related to accounts payable.
• Revenue: Holds transactions related to credit sales.
• Expense: Holds transactions related to credit purchases.
Ans: If identifying an amount in a suspense account becomes impossible, it may suggest fraud. However, while checking, remember to consider issues like an inaccurate recording of funds and unrecorded expenses. These can be traced back to their respective invoices.
Ans: Any creditor, being an individual or a corporate creditor, can open a suspense account if they have the contractual right to do so. However, an individual creditor who is less familiar with accounting can open a suspense account at a bank or consult an accountant.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
