What is a Suspense Account in Accounting? Definition and Examples
Suspense Account Definition
A suspense account is a temporary holding account used to record financial transactions that have questions around their accuracy and validity.
These potentially incorrect financial transactions are either initially recorded in the suspense account, or moved from the general ledger into the suspense account.
This separation from the ‘main’ accounts is important for ensuring that the financial statements reflect a true and reliable representation of a company’s financial position.
Suspense accounts serve as a placeholder until the missing or uncertain details are resolved, when they would be moved back into the general ledger.
Transactions recorded in a suspense can relate to both debits and credits.
It is important to note that suspense accounts are not meant to be a permanent solution, and therefore accountants should actively monitor suspense accounts and regularly resolve the items to ensure financial accuracy.
Suspense Account Examples
Let’s now look at some real-world examples where suspense accounts could be used:
Example 1: Unknown Payment
A company receives a payment paid into their bank account, but the transaction doesn’t have any reference details to be able to identify what the payment is for.
As cash has been received, an accounting entry will be recorded in the suspense account until the missing information is provided or obtained.
Example 2: Payment Received Pending Investigation
A company receives a payment paid into their bank account.
They know who sent the payment, however, the vendor has several outstanding invoices and haven’t specified which invoice the payment should be paid against.
As cash has been received, an accounting entry will be recorded in the suspense account until the information regarding which invoice the payment is for is provided.
Example 3: Accounting Error
When an accounting error is identified, such as a misclassification of expenses, the incorrect entry would be moved to a suspense account while the error is investigated and then ultimately corrected.