What is Suspense Account – Meaning & Examples of Suspense Account

Several circumstances may arise where one does not have adequate accounting information. Conceptual errors can hamper one’s booking efforts. Henceforth, in case an individual gets confused about where to keep a record of their entries, they can open a suspense account. In the below sections, you will get a detailed idea of what a suspense account is. 

What Is a Suspense Account?

Understanding the suspense account’s meaning is crucial. It is where you can record unclassified transactions temporarily. It keeps track of all the entries which you can further recheck and analyse before a permanent entry in a record book.  

Example of Suspense Account

A client hires a contractor to renovate various areas of their office building. Subsequently, the contractor delivers an invoice for ₹2,000 but they do not say if this is for the final bill or partial.

To follow up with their client, the accountant debits the appropriate amount from the suspense account and credits accounts payable with an equal amount.

How Do Suspense Accounts Work?

The main purpose of this type of account is to hold unidentified transactions temporarily. Firstly one needs to identify the nature of the payment to lay the groundwork for further processing. Then, he/she can open a bank suspense account and establish it in the general ledger.

Mostly, these accounts are at the end of the ledger and are given a unique code for easy identification. After posting the unclassified transaction into a suspense account, the investigation starts.

After resolving the dispute, the transactions are re-classified and transferred to the right account. Lastly, entries are adjusted to set right any inconsistencies that happened due to the presence of the transaction in such an account.

Types of Suspense Account

Primarily there are 2 different types of suspense accounts, one is a mortgage suspense account and the other is a business suspense account. Read below to know more about both.

1. Mortgage Suspense Account

Mainly banking institutions use this type of account. In case a borrower runs short of the required monthly repayment amount, then financial institutions use it to hold the borrower’s fund.

2. Business Suspense Account

These accounts are used in the business’s general ledger including entries. It highlights the discrepancies that need to be resolved later. Supposedly, if a customer initiates a payment but keeps the incorrect record of their account number, then the paid amount will be transferred into a suspense account. One must note that after the discrepancy is resolved, the payment will be cleared.

What Is a Clearing Account?

A clearing account is a type of general ledger account which contains funds that need to be transferred later to another. An example is the income summary account that, at the end of a financial year, will be used to transfer revenue and expense amounts into retained earnings.

Difference Between a Suspense Account & Clearing Account

The majority of people are confused between suspense and clearing accounts. In the below table, you will get a comprehensive idea of the basic differences between these two types of accounts.

Objectives of Suspense Account

Here are some of the prime objectives of a suspense account:

• One can create a suspense account if an individual makes a payment but is uncertain about the payee. In such cases, one can transfer the money to a suspense account.
• You can create a suspense account if your credit and debit balance sheets do not match.
• If your client makes a half payment but you are uncertain about which invoice the payment was made for, then you can transfer funds to your suspense account.

Features of Suspense Account

Below are the most prominent features of a suspense account:

• It is temporary in nature.
• This account deals with claims which have discrepancies.
• It deals with unclassified and disputed payments/transactions.
• Sometimes, it also deals with unallocated premiums.

Advantages & Disadvantages of Suspense Account

Before you open a suspense account, you must be well aware of all the aspects of it. Thus, read below to explore both the pros and cons of such an account.

1. Advantages of Suspense Account

1. It keeps the books of accounts organised by separating the unclassified transactions.
2. It acts as a temporary space for recording unambiguous transactions.

2. Disadvantages of Suspense Account

1. The longer you keep a transaction in your suspense account, the more potential it has to distort financial statements and decision-making. That is why the timely resolution is important.
2. Investigating and resolving disputes can be complicated, especially in large organisations with numerous transactions.

Final Word 

Primarily for businesses, a suspense account is a must to re-check transactions when credit and debit balances do not match. Before opening this account, one must have an adequate knowledge about accounting. If you lack expertise in this area, they can open such an account with a bank or consult with an accountant.

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Disclaimer

This article is solely for educational purposes. Stable Money doesn't take any responsibility for the information or claims made in the blog.