Suspense account entries are an accounting tool used to temporarily hold funds while any unidentified or unclear transactions are resolved. Many businesses will record a payment in a suspense account if there is a question about where to apply it in the general ledger. A mortgage servicer may also use a suspense account to hold a partial payment until it receives the remainder of the mortgage payment. Brokerage suspense accounts are often used to temporarily hold money until an investment transaction is completed.
It’s critical for a business to keep careful track of all of its assets and liabilities. But sometimes when money comes in, it’s not always clear where it’s supposed to be recorded in the general ledger. That’s where a suspense account helps — to give financial professionals a place to record uncertain transactions until they’ve done a little detective work to locate the permanent accounts where the payments belong.
Below, we discuss suspense accounts in depth, why they’re necessary, what types of businesses use them, and examples of why funds are temporarily routed to the suspense account in the first place.
What is a suspense account?
In its most common usage, a suspense account is a general ledger account used in many businesses to temporarily record transactions when it’s unclear which is the appropriate account to credit. It’s a common occurrence and often happens when a company receives a payment but doesn’t have sufficient information to identify the proper account.
You don’t want to avoid recording a transaction altogether just because you’re not sure of the correct account to post it to. In that case, you would be unable to balance the accounting books during a reporting period.
This is why accountants and bookkeepers make suspense account journal entries — to still keep track of ambiguous payments while avoiding the mistake of recording transactions in the wrong accounts. Once the anomaly is cleared up, the correct account can be credited properly, thus averting inaccurate financial results.
Managing suspense account entries
Obviously, you don’t want to just keep throwing unidentified transactions into a suspense account and end up with a cash account full of money you don’t know what to do with. Most of the time, it just takes a little digging to find the proper accounts and get that suspense balance back to zero.
Typically, all you’ll have to do is call customers, check over financial statements, and go through invoices to allocate payments to their respective accounts. If you still find yourself with unclassified transactions, you may have to dig deeper to find the missing information.
It’s also a good idea to take careful notes about the miscellaneous payments that come in. This way, you can start to identify patterns and areas that may become habitual problems. For example, you may have a customer that regularly sends in checks but never makes a note of the account number. When you’re aware of this, you can make a notation on the account so you don’t run into this issue in the future.
Finally, it’s a sound accounting practice for businesses to monitor suspense accounts on a regular basis. Larger firms may do this at monthly or quarterly intervals. However, smaller businesses may want to do it more often to avoid disrupting their cash flow needs.
Suspense account examples
There are a lot of reasons why a payment might need to be temporarily recorded in a suspense account. It might be because the account number is missing, for instance, or written down incorrectly. Here are a few other situations where a suspense account makes sense.
1. Customer made a partial payment
Sometimes a customer pays only a portion of what they owe. This can make it difficult to match up with the invoice, particularly if the customer has multiple outstanding invoices. For example, if Jane X sends in a payment for $500 but has an office supplies account with an outstanding balance of $700 plus an invoice for large office equipment for $2,000, it might be hard to decide where that payment should be applied.
In that scenario, an accountant would record the payment in a suspense account journal entry until further investigation can determine which invoice this particular transaction was meant for. Once the issue is resolved, the bookkeeper can make the adjusting entry — giving a credit to the proper account and taking a debit from the suspense account.
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2. Unknown payment or invoice
Sometimes a company gets a payment but can’t tell who it’s from. For example, the name on the check is unfamiliar or they don’t recognize the company. Rather than crediting the wrong account, the money is stashed in a suspense account until someone can figure out the correct account.
Similarly, a business could get an invoice in the mail that doesn’t note the product or service it’s meant to pay for. Until that’s cleared up, a bookkeeper might set that money aside in a suspense account so the cash is available as soon as they uncover the reason for the invoice.
3. Preparing a trial balance
A trial balance is used to create a company’s balance sheet, which is typically drawn up during each accounting period. The trial balance is a list of all credits and debits on an account. The point is to make sure the credit balance equals the debit balance for each account, explains Lyle Solomon, principal attorney at Oak View Law Group. And if they don’t match, you can record the difference in a suspense account until the issue is resolved.
“The final tally of an account at the close of an accounting period is the ‘closing balance’ or ‘trial balance.’ Any time a mismatch occurs between debits and credits, the difference should be held in a suspense account until the error is fixed,” Solomon explains. “On the trial balance sheet, the suspense account should be recorded under ‘Other Assets.’ Once the necessary adjustments have been made, the suspense account should be closed and removed from the trial balance.”
Other types of suspense accounts
While a suspense account is most commonly used as a general ledger account entry to help balance a company’s accounting books, it also has applications across other business models.
Mortgage suspense account
When you make a monthly mortgage payment, a portion of that money goes to the principal and some to interest. In addition, some of those funds are usually allocated to an escrow account which disburses funds to pay for property taxes and homeowners insurance.
However, sometimes a borrower falls short, meaning they only make a partial payment, or they overpay. In that case, that money may go into a mortgage suspense account until it’s determined how to properly distribute those funds.
A mortgage suspense account will most commonly be used when borrowers make partial payments. A lot of people like to split their mortgage payment into two payments, so the loan servicer would create a suspense account to hold the first partial payment.
On the other hand, if the borrower has overpaid, the loan servicer may not know where the extra money should go, so they need clarification from the borrower. For example, some people may want to put the extra funds toward their principal to save on interest. Others may want to use the additional money to pad their escrow account if they’re expecting their property tax or homeowners insurance to increase.
Brokerage suspense account
Like other suspense accounts, a brokerage suspense account is sometimes used as a temporary holding account when an investor sells securities but plans to reinvest the money right away. For example, if you sell off some stock for a profit of $5,000, that money might go into a suspense account until it’s reinvested in the market. The suspense account can also work as a security feature for investors, says Harry Turner, former hedge fund manager and founder at The Sovereign Investor.
“This helps manage transfers of funds by providing security and keeping track of where different amounts come from and go to during trades. When money goes into the suspense account, it is generally held there until any position related to it has been closed off, at which point the funds are released back into another trading instrument (e.g., stocks),” says Turner. “This makes sure that all parties involved stay informed about their respective holdings throughout each transaction, and no one loses out on their rightful returns through unaccountable activity like market manipulation or fraud.”
- A general ledger suspense account is essentially a catch-all account used in many businesses to record unclassified transactions before discerning their designated accounts.
- To avoid recording transactions under the wrong accounts, any ambiguous payments should instead be recorded as suspense account journal entries.
- Suspense accounts are also used by mortgage servicers if a borrower makes a partial payment or overpayment on their mortgage account.
- Brokerage firms might use a suspense account to temporarily hold the proceeds from a sale of securities that are meant to be quickly reinvested.
- Careful accounting procedures should result in a suspense account reaching a zero balance on a monthly or quarterly basis.
View Article Sources
- 5 Things to Know About Your Balance Sheet — Small Business Association
- Real Estate Settlement Procedures Act — Consumer Financial Protection Bureau
- Additional Actions to Improve Suspense Account Transactions Would Strengthen Financial Reporting — U.S. Government Accountability Office
- Assignment of Responsibility for General Ledger Accounts and Identification of Suspense Accounts — Financial Industry Regulatory Authority
- What Is a Payment Ledger? — SuperMoney
- Escrow in a Mortgage: What Is It and Why Is It Important? — SuperMoney