Sometimes, you don’t have all the necessary information for accounting. Missing or incorrect details can derail your bookkeeping efforts, but you need to record every transaction. Use a suspense account when you’re not sure where to record general ledger entries.
What is a suspense account?
A suspense account is an account where you record unclassified transactions. The account temporarily holds entries while you decide how you will classify them. A suspense account can also hold information about discrepancies as you gather more data.
When you open an accounting suspense account, the transaction is considered in suspense. You can open a bank account to hold funds for suspense accounts. This keeps uncategorized transactions separate from categorized transactions.
In accounting for small business, most suspense accounts are cleared out on a regular basis. To be cleared out, the account must have a zero balance. Move suspense account entries into their designated accounts to make the suspense balance zero.
Eventually, you allocate entries in the suspense account to a permanent account. There is no standard amount of time for clearing out a suspense account. Most businesses clear out their suspense accounts monthly or quarterly.
What type of account is a suspense account?
A suspense account is a holding account found in the general ledger. Depending on the transaction in question, a suspense account can be an asset or liability.
If it’s an asset in question, the suspense account is a current asset because it holds payments related to accounts receivable. A suspense account could also be a liability if it holds accounts payables that you don’t know how to classify.
When to use suspense accounts
There are several situations for holding an entry in a suspense account. Take a look at the following instances.
You’re preparing a trial balance
A trial balance is the closing balance of an account that you calculate at the end of the accounting period. When debits and credits don’t match, hold the difference in a suspense account until you correct it.
If the credits in the trial balance are larger than debits, record the difference as a debit. If the debits are larger than credits, record the difference as a credit.
List the suspense account under “Other Assets” on your trial balance sheet. After you make corrections, close the suspense account so that it’s no longer part of the trial balance.
You received a partial payment
You might receive a partial payment from a customer and be unsure about which invoice they’re paying. Hold the partial payment in a suspense account until you contact the customer. When you find out the invoice, close the suspense account and move the amount to the correct account.
You don’t know who a payment is from
You might receive a payment but be unsure which customer paid you. If you don’t know who made the payment, look at your outstanding customer invoices and find which one matches the payment amount. Contact the customer to verify that it’s their payment and the right invoice.
You buy a fixed asset but don’t receive it until it’s paid off
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.
You don’t know how to classify a transaction
You’re a small business owner, not an accountant. Sometimes, you might not know how to classify a transaction. If you’re unsure about where to enter a transaction, open a suspense account and talk to your accountant.
How to use suspense accounts
The purpose of suspense account entries is to temporarily hold uncategorized transactions. Open a suspense account when you need to use one. Close the account after moving the entry to the correct permanent account.
For suspense account journal entries, open a suspense account in your general ledger. Enter the full amount in question. The format of suspense account entries will be either a credit or debit. Also, enter the same amount with an opposite entry in another account.
When you get the information you need, reverse the suspense account entry and make an entry in the permanent account. This closes out the suspense account and posts the transaction to the correct account.
Suspense account examples
Take a look at these suspense account journal entry examples.
Example #1: Receiving a partial payment
You receive a partial payment of $50 from a customer.
Open a suspense account. Credit $50 to the suspense account. Debit the cash account for the same amount.
When you receive the full payment from the customer, debit $50 to the suspense account. Also, credit accounts receivable for the same amount. This closes the suspense account and moves the payment to the correct account.
Example #2: You’re not sure how to classify a transaction
A supplier invoices you for $1,000 of services. You might be unsure about which department of your business to charge, so you place the amount in a suspense account.
First, open a suspense account. Then, debit the suspense account and credit accounts payable.
Later, you decide to bill the supplies account of the purchasing department. To close the suspense account, credit the suspense account and debit the supplies account for the purchasing department.
|Supplies – Purchasing Dept.||1,000|
The importance of suspense account entries
Suspense accounts help you keep your accounting books organized. They ensure that you account for all transactions accurately in your books.
When you record uncertain transactions in permanent accounts, you might have incorrect balances. Suspense accounts help you avoid recording transactions in the wrong accounts. You also avoid failing to record a transaction because of missing information.
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This article is updated from its original publication date of December 5, 2017.This is not intended as legal advice; for more information, please click here.