Lately, we've been talking about the different types of accounts (see the valuation account and the nominal account) that you can set up as part of your business' accounting when you need to carry out specific financial activities. These types of accounts are more specialized than your standard income and expense accounts. Now we're going to take a look at another one of these specialized accounts: the suspense account.
What is a Suspense Account?
A suspense account is an account found on the general ledger that is used to record certain amounts on a temporary basis. (Learn all about the general ledger.) Eventually, all amounts recorded in a suspense account will be moved into another (read: permanent) account.
Why are amounts recorded in a suspense account in the first place, then? Generally, it's because the appropriate account could not be determined at the time the transaction needed to be recorded. For as long as a transaction is found in a suspense account and has not yet been transferred to its proper home, that transaction is "in suspense" with the suspense account is acting as a "holding account" for the transaction.
The Trial Balance and the Suspense Account
One situation in which having a suspense account comes in handy is when you are preparing your trial balance. The trial balance is the closing balance of a given account, calculated at the end of a certain reporting period. Its calculation forms part of the accounting cycle.
When your trial balance is out of balance (i.e., the debits are larger than the credits or vice versa) then the difference is held in a suspense account until the imbalance is corrected. Credits larger than debits? Record the difference as a debit in the suspense account. Debits larger than credits? Record the difference as a credit. The suspense account will be listed under "Other Assets" on your trial balance sheet. Once you've found the source of the imbalance and corrected it, the suspense account will be closed and will no longer form part of the trial balance.
As mentioned before, a suspense account can also be used when the proper account related to a transaction can't be determined when that transaction is initially recorded. Some examples of this would be when you receive a partial payment from a customer, or if you are unsure which invoice they are paying off. Once the payment confusion has been settled with the customer, the payment amount can be moved out of the suspense account and into the appropriate account.
For example, say you receive a partial payment of $100 from a customer. You would open a suspense account and add the $100 as a credit, and then debit your Cash account for the same amount (this ensures everything is in balance, as per the accounting equation). Once you receive the full payment from the customer, you're going to debit the suspense account for $100, then credit your Accounts Receivable for the same amount. The suspense account has now been closed out and the payment is in its proper place.
Have questions about setting up a suspense account, or any other type of account? Get in touch at email@example.com.