What Is a Suspense Account?

There are occasions when you don’t have access to all the data you need for accounting. It can hinder your accounting attempts by omissions or errors, so make sure to document each transaction. When unsure where to enter ledger account transactions, you can use a suspense account in accounting.

Did you know? A suspense account is a temporary account set up to correct discrepancies in the trial balance caused by an error or errors in the books of an account while the precise locations of transactions are being identified.

What is Suspense Account?

Lets us first see the suspense account definition. A company must record unclassified transactions in a suspense account. While determining how to categorise the items, they are momentarily kept in the suspense account. A transaction can be viewed as temporary when opening a suspense account. To keep the money for suspense accounts, you may open bank accounts. It maintains the division between categorised and uncategorised activities. 

Typically suspense accounts in small companies’ bookkeeping are regularly closed off. The accounts should have a "0” balance for closure. To keep the suspense account’s balance “0”, transfer the transactions from the suspense account into appropriate accounts. You transfer transactions from the suspense account to a ledger account at some point. You cannot have any fixed time for clearing the suspense account. Monthly or quarterly suspense account clearing is the norm for companies.

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Suspense Account Is Which Type of Account?

In the accounting records, a suspense account is just a waiting account. According to each deal, a suspense account may be a resource or a debt. If this is a property, the suspense account is a valuable product since it contains payments for accounts receivable. Whenever a suspense account in accounting includes payables you are unsure how to categorise, you can consider its liabilities.

Uses of Suspense Account

There are various circumstances where you will input transactions in a suspense account. Consider the following examples to learn about the uses of suspense accounts.

• You’re Preparing A Trial Balance

The closing balance of accounts that you can determine after the accounting cycle is known as a trial balance. Retain the discrepancy between debit and credit balances in a suspense account until they fix the error. Mark the differential as a deduction when the trial balance crediting is greater than the trial balance debit balances. Note the differential as a credit when the deductions exceed the crediting. Your trial balance page should include the suspense account below "Other Assets." Close the suspense accounts after making the necessary modifications so that it is not included in the trial balance.

• You Received A Partial Payment

If a consumer makes a partial payment, you may not even know whose bill they are covering. While you wait to speak with the consumer, you can keep the half payments inside a suspense account. Close the suspense account and transfer the funds to the appropriate account once you know the biller.

• You Don’t Know Who The Payment Is From

Sometimes, you receive the payments, but you might not know which customer made the payment. Look through your due customer bills to see which one corresponds to the payout due if you are unsure from whom you have received the payment. To ensure that the money is for the correct bill and client, get in touch with them.

Also read: Goodwill in Accounting - Learn About Types of Goodwill and How to Calculate Goodwill

• You Buy A Fixed Asset But Don’t Receive It Until It’s Paid Off

Whenever you purchase a fixed asset on a monthly payment but don’t receive it unless you pay the complete payment, you must use a suspense account. Close the suspense account and start a different asset account once you pay the last instalment and have the product in hand.

• You Don’t Know How To Classify A Transaction 

If you are the sole proprietor of a little business and not an accountant, you might occasionally be unsure about how to categorise a transaction. Create a suspense account and consult your bookkeeper if you're uncertain where to record a trade.

How To Create a Suspense Account?

You use the suspense account entries to keep unclassified transactions on reserve. When you require one, create a suspense account. After transferring the information to the appropriate ledger accounts, close it down. 

1. Create a suspense account in the accounting records for suspense account journal entries. 
2. Input the entire amount at issue. Suspense account updates will either have a credit or a debit structure. 
3. Additionally, input the identical sum with a different entry in a different account. 
4. Revert the suspense account transaction and create a record in the ledger account after you have the necessary information. 
5. You can close the suspense account and send the transaction to the right account.

Suspense Account Examples

Check out these samples of suspense account journal entries:

Example #1: Getting Payment In Instalments 

A client gives you a ₹100 half payment. Create your suspense account and add ₹100 to the suspense account. Charge the same sum to the cash account.

Withdraw ₹100 out from the suspense account once the consumer pays you in full. Additionally, credit the account receivables for an equal sum. By doing this, the suspense account is closed, and the money transfers into the right one.

Also read: What is Accounting Software - Key Features of Accounting Software and its Advantages

Example #2: You're Unsure Of What Category To Put A Transaction Under

You receive a bill from a vendor for ₹2,000 worth of supplies. You may put the money in a suspense account since you're not sure which division of your company to charge.

Create a suspense account first. After that, credit AP and charge the suspense account.

Later, you decide to charge the buying agency's supplier's account. Pay the suspense account and deduct the supply accounts for the buyer unit to close the suspense account.

The Importance Of Suspense Account Entries

You may maintain order in your accounting records by using suspense accounts. They guarantee that you properly track all activities in your records. The balances in the permanent accounts could be off if you document unclear transactions. You can prevent reporting activities in the incorrect accounts by using suspense accounts. You can also counter inaccurate data preventing you from recording a transaction.

Also read: What is Accounting Information?

Conclusion

A suspense account enables you to maintain orderly accounting records. It ensures that your accounting records are kept in an ordered fashion. It aids in ensuring that all transactions are entered under the appropriate headings. It raises the bookkeeping standard and ensures that every transaction is accurately represented. It functions as a makeshift bookshelf in which all the "odds and ends" goods can be kept while you identify their true nature. We risk having balancing problems whenever we register questionable transactions in actual accounts. It aids in preventing you from recording the transactions in the incorrect accounts. However, to better portray the situation, we must ensure that the suspense account balance is zero and that all inputs the company transfers to the appropriate accounts.
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