Consequently at the end of each accounting period the business carries out a suspense account reconciliation. Any balance is investigated so that correcting adjustments can be made before the final financial statements suspense account are issued. Accordingly irrespective of the issue resulting in the suspense account posting, at the end of the accounting period the account balance reduces to zero with correcting journal entries.
Suspense accounts contain entries where there are uncertainties or discrepancies. For instance, if someone deposits money but inadvertently writes down the wrong account number, the money will be kept in a suspense account until the mistake is fixed. If the cash came from the sale of an asset and couldn’t determine precisely which one https://www.bookstime.com/ it was, the entry would be in the asset suspense account. “A control account like this would typically sit within your trial balance. You would look to clear it down at the end of each accounting period you report on, be it monthly, quarterly, or annually.” A customer paid an outstanding $1,000 invoice in two partial payments of $500.
Classification of Suspense Accounts
The amount of money held in suspense account is referred to as the “suspense balance.” “We would recommend keeping track of suspense items within a control account in your accounting software,” says Alice Pearce, Senior Client Advisor at Wilson Partners accountancy firm. Let’s suppose you have been alerted that a remittance someone sent you from abroad is ready for withdrawal. Until you actually make the withdrawal from the agent or financial institution, the remittance money may be stored in their suspense account. When the credit side of trial balance is larger than debit side, the difference will be shown in Debit side. When the debits side are larger, the difference will be shown in credit side.
As the suspense account records the difference, an entry to it is needed, because the error affects the difference. However, there is no ledger entry for the other side of the correction – the trial balance is simply amended. In the world of finance and accounting, suspense accounts play a crucial role in dealing with uncertainties and discrepancies. A suspense account serves as a temporary holding place for transactions or balances that cannot be immediately classified or allocated to their proper accounts. Suspense accounts are temporarily classified as a balance sheet account, usually under the heading of current assets or current liabilities depending on the normal balance.
What Are the Disadvantages of a Suspense Account?
A client of an accountant contracts with a contractor to make renovations to various areas of their office building. Later, the contractor sends an invoice for $2,000 and requests payment, but they fail to indicate whether this sum covers all of the renovations or just a portion of them. To ask their client about later, the accountant debits the sum from the suspense account and credits the accounts payable with the same amount.
You might be unsure about which department of your business to charge, so you place the amount in a suspense account. If you’re unsure about where to enter a transaction, open a suspense account and talk to your accountant. Use a suspense account when you buy a fixed asset on a payment plan but do not receive it until you fully pay it off. After you make the final payment and receive the item, close the suspense account and open a separate asset account. Suspense accounts should be reconciled as frequently as possible, ideally on a monthly or quarterly basis. Regular reconciliation improves accuracy, allows for timely identification of issues, and enables swift resolution for a more precise financial picture.
Finish Your Free Account Setup
The accountant will then credit the suspense account with $50 and debit the cash account with the same transaction amount. When the company gets the entire payment from the customer, they will debit $50 from the suspense account and credit the receivable accounts with the same amount. When the process is finished, the accountant may finally terminate the suspense account and transfer the money to the correct account. A suspense account is needed because the appropriate account was not determined at the time the transaction was being recorded. As long as a transaction is found in a suspense account and hasn’t yet been transferred to its permanent account, it is placed in the suspense account, acting as its holding account for the transaction. Having a larger number of unreported transactions would mean that it won’t be recorded by the end of the reporting period, resulting in inaccurate financial outcomes.
However, a brief consultation with the respective accountant is necessary before taking such steps. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Unmatched amounts are clearly indicated, meaning you can go back and match them easily once you know where they belong.
Brokerage Suspense Accounts
It is useful to have a suspense account, rather than not recording transactions at all until there is sufficient information available to create an entry to the correct account(s). Otherwise, larger unreported transactions may not be recorded by the end of a reporting period, resulting in inaccurate financial results. When you receive the full payment from the customer, debit $50 to the suspense account. This closes the suspense account and moves the payment to the correct account.
- Suspense accounts help you avoid recording transactions in the wrong accounts.
- Any amount that is posted to the suspense account should be there on a temporary basis only, as this amount needs to be investigated and posted to the correct account.
- This closes the suspense account and moves the payment to the correct account.
- This keeps uncategorized transactions separate from categorized transactions.
- If so, the liability suspense account is classified as a current liability.
- Another type of asset suspense account, the entry would be in this section if money had been received but an invoice hadn’t yet been issued.
The draft statement of profit or loss showed a profit of $141,280 for the year ended 30 September 20X8. Two columns for – and + are the most practical arrangement for the answer. It should be noted that this type of question is unlikely to appear on either the FA or FR exam. Any of the errors in the aforementioned question can be tested on either of these exams, but a question on an FA or FR exam is unlikely to test this learning outcome with such a high concentration of marks.
What are the challenges of managing suspense accounts?
Proactive investigation, clear communication, and dedicated resources are crucial to effectively managing suspense accounts. Ideally, suspense accounts should be eliminated as soon as possible to ensure accurate financial reporting. However, in certain cases where resolution is delayed, suspense accounts may persist for an extended period.