What is a Suspense Account: Meaning & Importance Explained
Suspense accounts can have various meanings. However, in business, it generally means a specific section in a company's financial records where ambiguous and unknown entries are jotted down for further analysis.
This article will discuss its importance, purposes, and benefits. If you are into business, this might help you.
What Is a Suspense Account?
A suspense account in a general ledger contains uncertain or discrepant entries that one needs to resolve. Let us understand this with an example. Suppose an individual makes a purchase but writes an incorrect account number. Then, the money, in this case, will enter this particular account until they correct the error and then credit the payment.
Whenever suspicious entries occur, the people in charge address the issue and clear that account. Then, they re-shuffle the funds to their designated accounts. In addition, for its strange connotations, here, 'Suspense' implies that a transaction is temporarily suspended in a company's record.
What Is the Importance of a Suspense Account?
A suspense account acts as a filter in accounting, and it helps find transactions that could be unidentifiable at the time of their recording. These accounts keep a record book cleaner and free from mistakes.
Another importance of a suspense account is that it behaves like storage for unknown transactions. Moreover, it can only get a space in the ledger after someone identifies and rectifies the issue.
Different Types of Suspense Accounts
There are primarily two types of suspense accounts: Suspense accounts in business and Mortgage suspense accounts.
1. Suspense Accounts in Business
Suspense account in business’s general ledger(total record of all transactions carried over a span of time documenting changes to equity, assets, expenses, liabilities and revenue) encompasses entries which highlights discrepancies that must be resolved.
For instance, If a business client initiates payment but keeps the wrong track of their account number, the amount paid will be put into a suspense account. The payment will be credited only after the error is sorted.
Despite any scenarios, suspense accounts are eventually cleared and all the funds are re-shuffled to designated accounts.
2. Mortgage Suspense Accounts
These are used by financial institutions to hold funds in case borrowers run short of the required monthly repayment amount. There can be instances when borrowers make partial prepayments, and they can choose to clear the monthly payment, let's say into two parts.
In such a scenario, mortgage servicers can use suspense accounts for holding the first partial payment till the second prepayment has been made. Only after getting the entire payment, the mortgage servicer will pay the lender the principal and interest for that specific month.
When to Create Suspense Accounts?
There are certain situations when accountants need to create a suspense account. Here are some instances:
- While Preparing a Trial Balance: During the trial balance process, when the credit and debit balances do not match. Further, the difference amount can be put aside in that account for later inspection.
- When Receiving a Partial Payment: Sometimes, when a client makes a partial payment but is still determining through which invoice the payment was made leads to confusion. Hence, accountants move these transactions to a suspense account until they connect with the client and clarify the doubt.
- Unsure About Payee: One can create such accounts when they receive a payment but do not know who made it. When someone keeps such transactions separately in the suspense account, they can later check the records and match the payment details with the invoices. Once identified, the payee may be asked for a physical visit and verification.
What Are the Uses of a Suspense Account?
A suspense account allows a company to revise the nature of transactions while recording them. Apart from this, here are some other uses of this account:
- You can transfer unknown payment account information to this account until someone resolves this issue.
- This account helps at the time of booking transactions, which happen before allocation to the company.
- Such accounts help in case of any legal disputes.
- When a particular transaction is in transit, suspense accounts can prove helpful. One such scenario is when a payment is made, but the amount is yet to deposit in the bank. Another example can be when any organisation or company receives funds before drafting a contract.
What Type of Account Is a Suspense Account?
A suspense account is a holding account. It is classified as a current asset since it is used for storing payments. In addition, there are chances of having a liability suspense account containing accounts whose disposition is still under process. Such accounts are classified as a current liability.
Until now, we discussed the definition, types, uses and benefits of having a suspense account. However, you must know companies strategically include such accounts in their accounting systems because they are concerned for insurance companies. These are essential to several companies, as they allow rechecking transactions and minimise errors. So, now, if someone asks what you mean by suspense account, you know what to answer.